Why Ford's Sales Could Mean Big Profits


Ford won't release its fourth-quarter earnings until late in January, but the company did provide some clues to how things might shake out when it reported its December U.S. sales on Thursday.

The company's overall U.S. sales were up only about 2% in December versus year-ago totals, a result that might lead investors to say "meh." But the details matter, and a couple of those details hint at good things for Ford's fourth-quarter bottom line.

Behind the headlines, one big important number
Ford's PR folks naturally played up the company's strengths in the press release announcing the news. Sales of Ford's small cars were up 29% last year, with the compact Focus leading the way with a 40% gain. It was the best year for Explorer sales since 2006, and the best-ever year for the Escape.

That's all good stuff, and it looks for the most part like Ford's going in the right direction. But the real news was the strength of the company's flagship product, the F-Series pickup line. Sure, Ford trumpeted its usual talking point - that the F-series is "America's Best Selling Vehicle" and has been for 31 years, a factoid that takes advantage of archrival General Motors' strategy of splitting its sales of big pickups between the Chevrolet and GMC brands.

But on closer examination, there's some real fire behind the PR smoke. Ford sold a lot of pickups last month - nearly 70,000. And better yet, Ford executives said on Thursday that those sales came without resorting to big discounts.

That's good news, because pickups have been on a lot of investors' minds lately.

Why pickups are the key to Ford's profits
To say that pickups are important to Ford is something of an understatement. Here's why: The majority - by a wide margin - of Ford's profits come from its North American region. In fact, those profits are carrying Ford right now, as it invests heavily to expand in Asia and retools its hard-hit European operation.

And what's the big driver of profits in North America? You guessed it: full-sized pickup trucks, which are high-margin products that sell in huge numbers. At least one prominent analyst, Morgan Stanley's Adam Jonas, has suggested that as much as 90% of Ford's global automotive profits are attributable to the F-Series alone.

Those trucks have been powering impressive margins for Ford in its home market - 12% in the third quarter, big by mass-market automaker standards. But that has led some investors to be concerned: Ford's profits would appear to be very vulnerable to trouble in the pickup market at the moment.

Those concerns were amplified last month, after GM revealed that it had amassed an over-large inventory of pickups. Many predicted that the General would boost incentives to clear out all those surplus pickups, because it has an all-new model set to hit dealers in a few months. And it was reasonable to think that that would lead Ford to answer in kind, with big discounts that would hurt margins.

Big sales, but not big discounts
But that appears not to have happened. Ford sales VP Ken Czubay said on Thursday that average transaction prices for Ford's pickups in December were actually up a bit over last month. He also said that they were up significantly - at least several hundred dollars per truck, though Czubay didn't give specifics - over year-ago figures.

That's reassuring, not only for Ford's fourth-quarter profits, but for Ford's ongoing price discipline. The current generation F-series is entering its last year, with all-new models due in 2014. Ford has done a very good job of keeping its flagship product fresh and competitive throughout its current life cycle, but with GM set to launch all-new pickups shortly - and with Chrysler's recently refreshed Ram pickup receiving strong reviews - the concern has been that Ford would resort to heavy discounts to keep sales numbers up.

Happily, Ford didn't go there in December. And that bodes well for its fourth-quarter profits - and for the next few quarters, as well.

The article Why Ford's Sales Could Mean Big Profits originally appeared on Fool.com.

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