Ford's 2017 Super Duty. Image source: Ford Motor Company.
Continue Reading Below
Ford Motor Company (NYSE: F) has produced record profits over the past couple of years and has had one very impressive turnaround story since the dark days of the Great Recession. However, slightly disappointing second-quarter results this year raised some concerns. Investors were left wondering: How much of an impact will the Super Duty launch have on third-quarter results? And are incentives getting out of control?
Fortunately for investors, we now have some insight into those two questions.
Super Duty is an unsung hero
Investors and consumers alike have heard Ford tout its highly profitable and massively popular F-Series truck as America's best-selling truck. The F-150 takes much of the glory, but many overlook just how important Ford's Super Duty really is.
The Super Duty accounts for roughly 43% of the U.S. market for heavy-duty pickups and generates roughly 30% of total unit sales across all F-Series vehicles. Not only that, but the 2017 Super Duty is actually the model's first complete product overhaul in 18 years -- and Ford decided to go big and bold.
Continue Reading Below
"Super Duty is a very, very important product," Bob Shanks, Ford's chief financial officer, told analysts last month during a conference call. "It's high volume. It's very high margin."
Unfortunately, rebooting a massive vehicle like the Super Duty from the ground up comes with a hefty price tag. That's what has weighed down second-half 2016 earnings, according to management, but here's insight into just how much it will impact results in the short term.
Image source: Ford's presentation at J.P. Morgan Auto Conference, August 2016.
While investors may have been concerned due to the many comments during the conference call about Super Duty costs, those really only make up a portion of the overall headwinds that face Ford during the second half. The second-half slowdown of fleet sales may be the most overlooked negative impact coming up, surprisingly.
Are increasing incentives raising red flags?
Incentives are regarded as pure evil within the automotive industry, and many only remember the past incentive wars that destroyed automakers' bottom lines. While we're currently far from an incentive war, investors are getting a bit anxious to see how much incentives increase as new-vehicle sales peak in America.
While the first half of 2016 can only offer a glimpse into the story, it at least gives us some perspective.
Starting with passenger cars, Ford's incentives as a percent of vehicle price increased 200 basis points, to 16%, for the first half of 2016 compared to the prior year. That was a decent amount higher than the industry average, which increased 130 basis points, to 13.1% of passenger-car prices, over the same time frame.
With regard to SUVs, Ford's incentives as a percentage of vehicle price actually declined by 10 basis points during the first half of 2016, down to 12.3% year over year. That was also higher than the industry average of 8.3%. Meanwhile, the narrowest gap belongs to Ford's truck/van segment, which increased 90 basis points, to 8.9%, compared to the industry average of 8.7%.
In total, Ford's 11.6% incentive to average price was higher than the industry's 10%, but that doesn't tell the whole story. For the full story we have to look at the other end of the equation: vehicle price. Through the first half of 2016, Ford's total blended transaction price increased 3.9%, to $33,035, which was more than the industry's growth of 1.9%, to $30,914.
Sure, expectations for Ford's second half are lower, but the short-term pain for the important Super Duty reboot will be a solid long-term gain, and while incentives are trending higher for Ford, they're being recouped as its vehicle prices are accelerating faster than the industry average.
A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.
Daniel Miller owns shares of Ford. The Motley Fool owns shares of and recommends Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.