Ford's Latest Hit Drives Gains

Expectations were somewhat subdued, with analysts predicting a gain in the 9% range, but Ford (NYS: F) beat them handily: The Blue Oval's U.S. sales were up 13% in August, thanks in part to strong results for the new Escape SUV.

The Escape looks set to be the latest in what has been a string of hit new products for Ford. But like some of Ford's other recent hits, it's in danger of running into a problem that could limit Ford's sales growth going forward.

Ford may have another hit on its hands
Ford said that the Escape had its best August ever, with sales up 37% over year-ago totals. While that total includes some leftover 2012 models, as dealer stocks are still being sold off, it's clear that the all-new 2013 model has hit the ground running. As did last year's hot Ford debuts, the Explorer and Focus, the Escape has taken over the title of "fastest-turning vehicle" in Ford showrooms -- meaning that newly delivered examples are selling very quickly.

For Ford shareholders, this is very good news: The company's product momentum is continuing. That bodes well for the success of Ford's next debut: the all-new Fusion sedan, due this fall. But that success comes with a caveat: The Escape's sales growth potential may be limited.

In announcing its sales totals on Tuesday morning, Ford noted that demand for the Escape has been so strong that the company added a third shift at the factory that makes it. While that's a good thing in and of itself -- auto factories are most profitable when they are being run at full capacity -- it also points to a concern: Production could be maxed out before long.

Making the most of limited production capacity
CEO Alan Mulally suggested earlier this year that North American production of a few popular Fords like the Explorer and Focus was nearly maxed out, and that without (very expensive) investments in new plants or assembly lines, Ford's sales growth could be limited. Making things more complicated, a major increase in production would require Ford's suppliers to ramp up as well -- something that many supplier firms, fresh off their own near-death experiences during the economic crisis, have resisted.

Ford has said it would find ways to incrementally increase production of the company's hottest models. Those efforts appear to be bearing fruit to some extent: Sales of the Focus were up 35% over year-ago numbers in August, and Explorer sales were up 33%.

Ford is making the right moves given its capacity constraints. The company's per-vehicle spending on "incentives" (cash-back and cheap-financing deals) fell almost 3% from July to August, according to new estimates from Ford's spending on incentives now trails that of General Motors (NYS: GM) and Chrysler significantly -- and Nissan's (NASDAQOTH: NSANY.PK) -- though it's still a bit above the industry average, TrueCar says. Meanwhile, spending by rivals like Toyota (NYS: TM) has been on the rise.

That's consistent with Ford's ongoing strategy: Match production to demand, keep incentives as low as possible, and maximize margins and profits. That worked out well for Ford last quarter, as the automaker posted strong profits in North America, and it appears to be continuing.

Despite constraints, gains across segments
Meanwhile, other indicators suggest that Ford is making incremental gains in the U.S., even as some rivals post much flashier sales increases. While Ford's overall sales were up 13% over year-ago totals, its retail sales were up a handsome 19%. That suggests that Ford may be allocating limited production to (more profitable) retail channels and away from (less profitable) fleet sales, a good sign.

Sales were strong across segments: The F-series pickup line posted its best sales month of the year, continuing a recent trend of strong pickup sales, with a 19% increase over year-ago sales. The Explorer SUV had its best U.S. sales month since 2006, and its midsized sibling, the Edge, posted a 23% gain. Meanwhile, sales of the outgoing Fusion sedan remained very strong, up 21%, as the company continues to sell down stocks to make room for the all-new 2013 model due shortly. Even the Mustang had a strong month, with sales up nearly 12%.

Long story short: Ford's sales gains aren't as dramatic as some key competitors. But the company continues to make good moves despite capacity constraints, and its all-important North American region appears to be on track for another solidly profitable quarter.

Ford's stock has been under pressure lately, dropping to levels not seen in years. But the company is still performing very well at home and is investing heavily for growth abroad. Have these short-term pressures created an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Get instant access to this premium report.

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