Ford Motor Company (NYSE: F) investors rejoice! For months Wall Street and individual investors have been frustrated with the scarce details about how the company plans to ignite growth and improve its bottom line. The vague punch line of getting "fit" wasn't inspiring, but now Ford's responded in detail about how, exactly, it expects to drive itself out of the rut it's been stuck in.
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The automotive industry is poised to evolve more over the next two decades than it has over the past ten. However, strategies to capitalize on autonomous vehicles, electrified fleets, and smart-mobility projects are all expensive to develop and will take years to bear fruit. Fortunately, while Ford will obviously continue to focus on developing its future, it plans to ignite growth in the near term with a massive portfolio refresh.
In fact, Ford is aiming to have North America's freshest lineup among full-line automakers by 2020. To do this, management plans to replace more than 75% of the current vehicle portfolio while adding four new trucks and SUVs -- that's what consumers want, and that's what Ford does best. Refreshing the portfolio to that degree will significantly drop its average showroom age from 5.7 years to 3.3 years. It shouldn't be overlooked how drastic a change that is, especially considering that fresh vehicles sell faster and support higher prices.
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"Our passion for great vehicles is stronger than ever," said Jim Hackett, Ford president and CEO, in a press release. "This showroom transformation will thrill customers, drive profitable growth and further build toward our future of smart vehicles in a smart world."
Zeroing in on "profitable growth" from the quote above: Ford's focus on trucks and SUVs should improve the top line in the near term. Consider that from 2014, when the new F-150 launched, F-Series prices have moved up $6,700 per vehicle. If Ford can hold its costs constant, that price increase can drastically improve gross profit and margin.
Management also estimates that SUV sales could account for 50% of U.S. retail sales by the end of this decade. As sales of passenger cars decline, and consumer preference moves to sport-utility vehicles, Ford plans to swap $7 billion in capital from developing cars to SUVs. LMC Automotive projects Ford's SUV sales to jump 20% by 2020 -- double the industry's growth rate. Ford's lineup of full-size trucks and SUVs powers the company's results, so a focus on those segments should boost its near-term results while it continues to play the long game with smart-mobility and electrified vehicles.
Still getting fit
So Ford's plan is to rejuvenate its vehicle portfolio in North America, with an SUV flavor.
But management is still determined to "get fit": An example is its target to cut new-product development time, from sketch to dealer showroom, by 20%. It's part of the automaker's commitment to deliver $4 billion in engineering efficiencies. Simplicity is also part of Ford's strategy: It reduced orderable combinations of Ford SUVs by 80% since 2014. Management also aims to curb plant changeover time by 25%, which would add roughly $50 million to the bottom line per changeover.
Investors should walk away from these details somewhat relieved -- and one analyst has even turned optimistic. It's been almost a year since Jim Hackett took over Ford, and this is the first meaningful set of details we've seen about how Ford intends to stoke growth and improve its top and bottom line. There's plenty of work to be done -- especially as sales slow in the world's most lucrative auto market, North America -- but a drastic vehicle portfolio refresh is a much-needed step forward.
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