Ford Motor Co.’s fortunes are fading while General Motors Co.’s have risen to a quarterly record. To understand why, look no further than big sport utility vehicles that have come roaring back as U.S. gasoline prices plunged.
In the battle of the behemoths, GM is dominating. It controls 49% of the U.S. market for large and luxury SUVs with models like the GMC Yukon and Cadillac Escalade, while Ford has just 13% of that lucrative business, according to Morgan Stanley analyst Adam Jonas. In a product category where profit margins swell to 20 percent or more, that can give GM an annual $2 billion pretax profit edge over Ford, he said.
That helps explain why Ford’s third-quarter net income fell by more than half to $957 million, while GM booked a record $2.8 billion. There were other factors affecting Ford, such as spending big to introduce its aluminum-bodied Super Duty pickup and getting hit with a $600 million tab for a door latch recall. But Ford’s bet a few years back that $100-a-barrel oil would make dinosaurs of big SUVs is not working out.
“The company’s bet on higher-for-longer oil prices may be out of step with the consumer for the next few years,” Jonas wrote in a note Thursday. He rates Ford shares under weight and GM’s over weight.
Back when gas prices were soaring to near $4 a gallon, Ford went all in on a strategy to bolster its offerings in small cars, small engines and fuel-efficient, aluminum-bodied trucks. At the time, that was what consumers were craving and the U.S. government also mandated that automakers improve fuel economy by 40% to 54.5 miles per gallon by 2025. Now, with cheap gas driving buyers back to SUVs, Jonas contends Ford has the wrong lineup.
“I vehemently disagree with that,” Bob Shanks, Ford’s chief financial officer, said in an interview. “We’ve set ourselves up well for the next decade. And what that forgets is that we still have these regulatory requirements, whether people like the fact that gas prices are high or are low.”
Shanks acknowledges GM “clearly has an advantage” in big SUVs, but said Ford will begin to get a “better and fairer share of the revenue in that segment” next year when it introduces new, aluminum-bodied versions of the Ford Expedition and Lincoln Navigator.
“They’ll be straight state-of-the art, gorgeous, beautiful with great interiors,” Shanks said of the most substantial redesign of its largest SUVs in years.
For now, Ford is slashing production of slow sellers like the Fusion sedan and Focus compact. The Dearborn, Michigan-based automaker temporarily shut five plants this month. After cutting production 12% in the third quarter, Ford is curtailing factory output by another 12.5% in the year’s last three months to reduce inventories of unsold cars.
That’s a direct hit to the bottom line because the company books revenue when a car or truck leaves the factory, not when it is sold in the showroom.
Chief Executive Officer Mark Fields has said profit would fall this year and next as the automaker spends big to transform itself into a mobility company that can take on interlopers like Uber and Google. Fields rejects the idea that his company is taking a more pessimistic approach to the slowing market than Detroit-based GM.
“I would call our approach realism, not optimism, not pessimism, it’s realism,” Fields told analysts Thursday on a conference call. “We do see a marketplace, from a cycle standpoint, it’s matured. We’re being very proactive and taking very prudent actions and realistic actions for our company.”
Ford’s U.S. light-vehicle sales fell 6.7% in the quarter to 632,123 from 677,163 a year earlier, according to researcher Autodata.
Investors have taken a pessimistic view on Ford, trading the shares down 16% this year through Wednesday. The stock fell 1.2% to $11.74 at the close in New York.
Ford’s third-quarter profit decline was narrower than analysts estimated because some marketing and operating costs the automaker expected in the period won’t show up until the fourth quarter. Profit excluding some items was 26 cents a share, compared with the 20-cent average projection of analysts surveyed by Bloomberg.
The new Super Duty pickup also commanded prices averaging above $62,000 a vehicle, offsetting a decline in F-150 prices, as the automaker sold models not as lavishly outfitted with options as it did a year ago. There were also problems in the Super Duty’s manufacturing rollout.
“We have had some supplier issues,” Shanks said, without specifying the problems. “There’s never a perfect launch. These are very complicated vehicles with thousands of parts coming together.”
Ford expects operating cash flow to turn positive again this quarter after posting a rare $2 billion negative cash flow in the third quarter, he said.
GM, facing the same market conditions and investing in autonomy like Ford, said it expects earnings this year to hit the high end of expectations. Fiat Chrysler Automobiles NV, which had a 29 percent increase in earnings in the third quarter, raised its profit forecast for the year to at least $6.3 billion.
That’s a contrast to Ford reducing its full-year profit outlook last month to about $10.2 billion pretax from a previous forecast of $10.8 billion.
Ford may also be going too big with its $4.5 billion investment in electrified vehicles and overestimating how quickly the market will shift to self-driving vehicles, Jonas wrote in an Oct. 13 note. The company has said it will be selling 100,000 robot taxis a year by 2021.
“Ford wants to rebrand itself as a mobility company,” Jonas wrote. “We think it will be a pure play auto company for many years to come.”
The automaker’s big bet big on new mobility ventures will pay off, Fields said in an interview on Bloomberg TV.
“For the foreseeable future, we’re going to be in investment mode” on mobility projects, Fields said. “Clearly the investments we’re making in emerging opportunities, whether it’s electrification or autonomy or mobility, will impact our earnings. Further out, those businesses will start to contribute to the company’s bottom line.”
Investor Bernie McGinn has grown tired of waiting for that pay off and he has begun selling off his 400,000 shares of Ford. The president of McGinn Investment Management in Alexandria, Virginia, grew increasingly frustrated as he watched the value of his investment fall more than 30% since Alan Mulally retired as CEO on July 1, 2014.
“Alan Mulally was a once-in-a-generation executive,” McGinn said. “Becoming a mobility company is going to take a huge investment in dollars and in focus. Ford came back because they focused on coming back and that’s my fear.”