Ford (F) just reported a first quarter profit of $2.55 billion and far exceeded an earnings consensus of 50 cents per share with a 61 cent result. The company hasn't made this much since 1998, the heyday of big SUVs. Small cars are the secret of its success now. But it's not as if it's neglecting big cars. What it is neglecting is market share.
Superb management gets its reward
There's no arguing that Ford is on a roll. Seemingly every management decision it's made since the mid-2000s has paid off. CEO Alan Mulally's borrowing spree in 2006 -- $24 billion -- spared Ford the government bailout and bankruptcy that General Motors and Chrysler endured. And a move to build more fuel-efficient cars based on global vehicle designs means that Ford has cars in the the market now that can help consumers defend themselves against rising gas prices.
The company really only has two issues to deal with. First, it's carrying more debt than its Detroit rivals, who both had their balance sheets cleansed by Chapter 11. The burden is now under $17 billion and falling. This represents a hidden drag of course because every dollar spent servicing or eliminating debt is money that can't be used for new product development. And it does raise the question of whether Ford will spook the markets if it ever issues new debt.
Stranded with small?
Second, Ford is better-situated than its U.S. competition to capitalize on a move to small cars. If past trends are an indication of future events, however, buyers will switch back to larger vehicles when gas prices begin to drop. But Ford won't be stuck with a small-car strategy because what it's really going for is a fuel-efficiency strategy.
For example, Ford is selling a turbocharged six-cylinder version of its F-150 pickup. It doesn't get 40 mpg, but as full-size pickups go, it's impressive at 22 mph on the highway.
Market share doesn't follow
If there's one area where Ford isn't doing as well as it could be, it's market share. The Blue Oval is stuck in the 16 percent neighborhood and actually lost some share in the first quarter. As Japanese carmakers grapple with the aftermath of the March earthquake and tsunami, Ford ought to be able to solidify its number two U.S. position (behind GM) and put some distance between itself and Toyota (TM) and Honda.
That doesn't look like the game plan, however. This is from Barrons:
Ford said the share losses were based in part on refusing to offer incentives as large as its competitors; the company expects U.S. and European market share for the full year to equal or improve from 2010.Fine for the moment, but not for later
"We did take a little bit of a hit in market share but it's the right thing to do to run a profitably growing business in the long term," said CEO Alan Mulally.
Ford currently has an almost perfect core vehicle lineup (although Lincoln, its luxury division, needs work). If it can achieve profits and expand internationally, it can afford to keep its market-share goals on idle for a while as it tackles its debt.
But the company does need to consider that the Japanese carmakers won't stay down forever. Wall Street loves Ford's profits and sees it as the best investment in the business. But I think it would smart for Ford to take share from Toyota, Honda, and Nissan this year, so that the Japanese have to fight that much harder in 2012 to get it back.