September 30, 2014 / 11:00 PM / 3 years ago

Analysis: Ford's rosy 2020 outlook hinges on new F-150, Lincoln

DETROIT (Reuters) - If Ford Motor Co’s (F.N) new chief executive Mark Fields hoped to muffle the shock of an earnings outlook rollback on Monday by unveiling aggressive growth targets for 2020, then it did just the opposite, as investors and analysts were doubtful about the ambitious plan.

A Ford logo is seen on the grill of a 2015 F-150 truck outside the New York Stock Exchange in the Manhattan borough of New York, January 13, 2014. REUTERS/Lucas Jackson

Fields, who succeeded popular CEO Alan Mulally on July 1, unnerved investors by cutting the company’s profit outlook for this year and next, citing the cost of recalls as well as weakness in Russia and South America.

But he and his executive team also laid out an ambitious six-year plan that hinges on several key elements, notably the success of the redesigned 2015 F-150 pickup in North America and a $2.5-billion effort to rebuild the stagnant Lincoln brand in the United States and China.

“Mark probably wanted to put his stamp on things early,” said Matt DeLorenzo, managing editor of Kelley Blue Book, a leading auto website. “He needs to appear to be a bold and decisive leader, but he has a lot on his plate.”

Ford’s challenges and setbacks come as U.S. sales are on an upswing. While domestic rivals General Motors Co (GM.N) and Chrysler Group FIA.MI have seen year-to-date sales rise 3 percent and 14 percent, respectively, Ford has dropped by a fraction, due in large part to the lengthy and costly changeover to the new F-150.

General Motors will provide an update on profit expectations for 2014 and a long-range financial outlook on Wednesday at its investor day. GM closed down 0.87% to $31.94 on Tuesday. Ford closed down 2.12 percent at $14.79. Both companies are near their 52-week lows.

The launch of Ford’s aluminum-intensive F-150, which goes on sale this fall, is the most critical order of business: The big F-series truck, America’s best-selling vehicle, historically has contributed the lion’s share of Ford’s global pretax profits.

The new model will cost more to build, Ford executives have acknowledged. And analysts said the automaker may not be able to recover all of those costs, including those associated with more expensive features and production lost through lengthy changeovers at two U.S. plants, through higher pricing for several years.

“Investors should allow for lower margins” on the new F-150 “at least for the next few years,” said Morgan Stanley analyst Adam Jonas in an investor note on Tuesday.

Without providing details, Ford executives expressed the longer-term advantage of being the first to spend billions of dollars to take weight out of its full-size trucks and introduce smaller, more efficient engines in order to meet stiffer U.S. fuel economy and emissions regulations toward the end of the decade.

“We believe this investment” in the new F-150 “pays off not just in 2014 and ‘15,” but throughout the truck’s extended life cycle, according to Joe Hinrichs, Ford executive vice president and head of the Americas.

A bigger gamble is the massive investment in reviving the Lincoln brand, whose sales have been in the doldrums for years as new product investment has languished.

Part of the investment covers the launch of a redesigned MKX crossover next year and a replacement for the big MKS sedan in 2016. Ford also said it will add two new Lincoln models by 2020.

One of the new Lincolns is expected to be a premium compact sedan in 2018 that will share its underpinnings with the next-generation Ford Focus, according to two industry sources familiar with the company’s plans.

Also under consideration for 2019-2020 is a large rear-wheel-drive sedan and a compact crossover vehicle that’s smaller than the recently introduced MKC, the sources said.

The sources could not speak on the record because they were not authorized.

But Ford is just now launching the brand in China, where it expects annual sales to reach 150,000 by 2020. Over the same period, it wants to grow Lincoln sales in North America from roughly 100,000 a year to 150,000.

Those targets seem overly ambitious, said Joe Langley, an analyst at research firm IHS Automotive, which is forecasting global Lincoln sales of 150,000 in 2020, about half of Ford’s target. In comparison, GM’s Cadillac last year sold 250,000, including 50,000 in China.

“Ford knows it needs a luxury brand to bolster margins and reduce its over-reliance on the F-series for profitability,” Langley said. “But it faces a multi-decade, multi-billion-dollar effort to build Lincoln into a credible luxury brand in the U.S. and China.”

Bob Shanks, Ford chief financial officer, acknowledged as much to investors on Monday, saying, “You really have to think about Lincoln as a much longer play . . . We’re in an investment mode over the next five years to prepare for something much more meaningful in the next decade.”

Reporting by Paul Lienert, Bernie Woodall and Ben Klayman in Detroit; Editing by Bernard Orr

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