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How Ford Motor Can Pivot

|Includes: Ford Motor Company (F), FCAU, GM, TSLA

Let's not beat around the bush. Ford's (NYSE:F) Q2 results were a surprise to everyone. No one expected Q2 to look like this, especially after the launch of the F-150 a year ago and the impact it had on the bottom line

What is so alarming now? The market is poised to sell over 17M vehicles in the U.S. this year.

Revenue was up by over $2B in Q2 while market share decreased and income decreased. F-Series continues to hold down the fort, even after attacks from General Motors (NYSE:GM) about Ford's use of aluminum.

One area Ford can't seem to stem the bleeding is their car lineup. Ford recently took Fusion production out of their Flat Rock plant to make room for production of the Continental sedan. Not so fast. The day supply of Fusion sedans had skyrocketed and Mexico was still pumping them out at full tilt. It doesn't appear that it was action to make room for another model at Flat Rock but to decrease inventory to reduce daily rental fleet sales and normalize inventory. A step in the right direction to stop the blood loss but it's not enough.

Ford has been taking a lot of downtime at their Michigan Assembly Plant (MAP), the home of the Focus and C-MAX. Once billed as theirmost flexible plant, it would make sense to better utilize the MAP to make crossovers that Ford claims they can't make enough of. The Focus, C-MAX and Escape share many of the same parts and even the same platform.

Ford executives gave guidance that said they expect a rocky road ahead. It's still not clear why though. Some of that blame is on the launch of the Super Duty pickup. The Super Duty is almost 20 years old and is moving to the same aluminum cab as the F-150. When Ford launched the F-150, they lost about 6 weeks of production at each of their F-150 plants. Super Duty is a bit different because Ford was able to build a new body shop while the outgoing model was still being produced, reducing the changeover time to a few days around the 4th of July holiday. Ford claims Super Duty launch will impact the bottom line for Q3. This could be a sign of some other issue that has delayed the launch timing.

Ford could also broom some of their less popular models from their lineups to increase capacity for better selling models. MKT, Flex and Taurus...I'm looking at you. Dropping these models would help with building more vehicles that consumers are demanding.

Where is Ford's Jeep Renegade and Buick Encore competitor? It's missing in action. Ford has missed the boat in this rapid growth segment.

It's not all doom and gloom though. GM is experiencing red hot sales of their large SUVs and Ford can't seem to give them away. Navigator and Expedition haven't seen any real investment since 2002. New aluminum models will be available next year and will hopefully turn around the abysmal sales for these cash cows as GM reaps Ford's loss. Ford also is getting ready to add a diesel F-150 to their mix. Whatever fuel prices decide to do, Ford appears to be best suited to adapt to changes for light trucks. The profit margins on pickup trucks are so large that even Elon Musk has said recently that Tesla (NASDAQ:TSLA) needs to add a pickup truck to their lineup. Pickup trucks are the cash cow for Detroit and everyone is gunning for F-Series, even Silicon Valley. The Japanese haven't been able to figure that formula out and Tesla will face a similar battle.

Ford is also going gangbusters with their new Transit full-size van. Yes, it's not a particularly sexy part of the automotive market but it gives color on what small businesses are thinking about future confidence. The Transit has been a huge success for Ford in the U.S. and demand does not seem to be slowing down.

Ford's recent launch of Sync 3 infotainment has also been met with a wide range of praise from the media.

Ford's short and long term success rest on their ability to discipline themselves with daily rental sales and incentives. Look at the lot at Hertz, Enterprise, and Avis. It's loaded with Ford models. Theincentives on a Focus are huge, considering the market is over 17M SAAR. Ford needs to dial it back. Take some heat with short term lower fleet sales that help to boost residual values. It's a long term plan but GM has been doing it and it is paying off. Camaro sales aren't a match for Mustang but that is due in part to a huge reduction in rental car sales and Camaro just launching their convertible at the end of Q2.

Mark Fields needs to pull the right levers in a timely manner or incentive spend could get out of control. Incentive spend should be in check, especially in a 17+M market. Fiat Chrysler's (NASDAQ:FCA) incentive spend on Dart and 200 was so large that they decided to pull the plug on production all together. Ford doesn't need to do anything as drastic but they need to make better use of the capacity they have to build the right products. If Michigan Assembly is so flexible, build the Escape and Lincoln MKC there.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.