Cheaper Vehicle Prices Will Hurt Ford Stock

Is Ford’s plan to replicate the airline industry’s business model a good one?

I was told to write about Ford (NYSE:F) stock today. 

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Scratching my head trying to figure out what to write about, I came across an article from Jalopnik, a magazine about cars and other vehicles, that could have negative ramifications for Ford stock.

Let me explain.

Ford’s Prices Are Dropping

Ford CEO Jim Hackett recently suggested that, in order to make its vehicles more affordable,  the manufacturer is pursuing a strategy that he calls “decontenting.”

On the surface, that’s great news for consumers because the average price of a new U.S. vehicle in May was $36,718, up 2.7% from 2018 and 4.8% higher than 2017. 

Considering that 44% of American car owners have a loan outstanding on their vehicles, the 5.7% interest rate most people are paying at the moment is really hurting many consumers. 

Car companies like Ford are worried that the rising cost of vehicles will price many of their customers out of the market, leading to a permanent reduction of their sales. That would not be a good thing for Ford stock. 

Faced with the prospect of losing customers, Ford has chosen to provide stripped-down versions of some of its vehicles in an effort to make them more affordable.   

This is where things get interesting, according to Jalopnik contributor Andrew Collins: 

“Airlines didn’t start charging for carry-on bags so your plane ticket could be cheaper. Well, they did, ostensibly. But the objective of corporations was and always will be boosting profits. And in the case of airlines, and Hackett’s decontenting idea, that could happen by charging more for things most people need as basics,” Collins stated.

Do you see where he’s going with this?

Collins, quite rightly, suggests this move by Ford is nothing more than a ploy to lure traffic into its dealerships. There, unsuspecting car buyers will be optioned to death, creating an “illusion” of lower prices, but extracting the same amount or more through all the high-tech features available today. 

Ford’s merely moving money from one pot to the other. 

“Auto loans will continue to inflate, Ford’s communications manager will keep bragging about the F-150’s stratospheric average transaction prices, and decent new vehicles will continue to get harder to afford,” Collins argues. 

Why Is That Bad for Ford Stock?

Henry Ford created the Model T so that everyday people, including the employees who worked on the Ford assembly line, could afford to buy one. There were no 72- and 84-month car loans in those days. People put money aside until they could pay for a vehicle in cash. 

Simple.

Today, with the rising cost of vehicles, consumers almost need to bring an accountant with them when they go to buy new cars. That’s so far removed from the vision Ford’s founder had for his company that, if he was alive today, he probably wouldn’t recognize Ford. 

Ford plans to sell a few  low-priced vehicles to keep the manufacturer’s suggested retail price (MSRP) low. It will then look to sell as many options to as many people as possible to make up the difference and then some. 

Unfortunately, that won’t solve the auto loan crisis that’s slowly building to a boil. 

In 2017, car loans accounted for 9.03% of the total U.S. debt balance. That doesn’t seem like a lot, considering that mortgages make up 67.63% of total U.S. debt. However, car loans now account for the highest percentage of U.S. debt since 2003, when auto loans accounted for 9.27% of the total.  

In a Q3 report, the Federal Reserve Bank of New York stated that the value of auto loan originations, which include both newly opened loans and leases, stood at $159 billion, the second-highest number on record. 

Auto loans are out of control.

If Ford truly cared about making its vehicles affordable, it would substantially lower the “fully loaded” price of its vehicles rather than stripping them to the bones. Its current strategy is nothing but a way for it to reduce its expenses while increasing its sales and profits.

The owners of Ford stock better hope consumers don’t get wise to its sleight-of-hand trick. If they do, the results could be disastrous for Ford and Ford stock.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

 

    

 

 


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