Why Ford is talking like auto sales have peaked – USA TODAY
A $2-billion profit for three months is nothing to sneeze at, but Ford executives are sounding as if they had been debriefed by a coal miner’s canary chirping about how it’s feeling a little light-headed underground.
Automakers are spending more on rebates and other discounts to lure buyers. More customers are defaulting on car payments, although the total is still historically low.
The next three months will be tougher for Ford. It will be spending heavily to launch the new Super Duty pickup, one of the most expensive and profitable vehicles it makes. The mammoth truck has been completely re-engineered for the first time in 19 years, featuring the same aluminum body panels showcased on its smaller brethren, the F-150.
The unanswered two-part question: How specific are these factors to Ford? And how much will they impact the industry overall?
For most of the last year, selling new vehicles, especially pickups, SUVs and crossover models, has been like shooting fish in a barrel. Credit was easy. Interest rates are still low. Consumers have been able to borrow enough for the car they wanted, rather the one they needed.
But the cars they’re trading in have fetched lower prices at used-car auctions. And there was a modest uptick in delinquencies for Ford Credit.
“There’s no question we’ve seen an increase in incentives, and it’s more than we expected at the beginning of the year,” Ford Chief Financial Officer Bob Shanks told analysts Thursday. “We see the second half being softer than the first half. Looking into 2017, we think we will see further softness.”
Investors saw it as confirmation of suspicions that the U.S. market has crested. Ford shares tumbled nearly 10%.
There was good and bad news from Ford’s European business. Pretax profit in the second quarter nearly tripled from a year earlier, to $467 million.
But Shanks warned of a $145-million negative impact in the second half from uncertainty created by the United Kingdom’s vote to leave the European Union. Britain accounts for one-third of Ford’s European sales, and consumers are expected to buy significantly fewer vehicles in coming months.
The company posted a tiny loss ($8 million) in its Asia Pacific operations, that region’s first red ink in 13 quarters, reflecting falling prices in China and a planned eight-week shutdown of a plant in Chongqing.
So Ford CEO Mark Fields said costs will need to be cut more aggressively.
“We will match production to demand,” Fields said.
That could mean that certain assembly plants could take a week of downtime here or there if the vehicles they make experience falling sales.
In historical context, the market is still strong, just not as giddy as it was between last fall and early spring. But the signals became apparent to Fields and Shanks in recent weeks.
“I would call them early signs of the maturation of the cycle,” Shanks said.
Ford shared tumbled nearly 10% Thursday, and there was some spillover effect.
Stock for General Motors, which last week surprised on the upside with a $2.9-billion second-quarter net income, slipped more than 3.5%. Fiat Chrysler, which Wednesday beat Wall Street expectations with a $352-million second-quarter profit, saw its shares drop more than 5% in midafternoon trading.
“You already have investors out there who have expected the auto cycle in the U.S. has peaked, and Ford gave them confirmation,” said David Kudla, CEO of Mainstay Capital Management in Grand Blanc.
What is he telling his clients about auto stocks?
“We’ve been neutral on autos for a while, and where we have held them in our portfolios, we have reduced our holdings in recent months,” Kudla said. “In the U.S., the increased competitiveness for that flat or shrinking market will lead to increased incentives and as an automaker, that hurts your bottom line.”