) announced its second quarter numbers which highlighted the
strength of its North American and Chinese operations.
Although Ford has done tremendously well to overhaul its
operations in recent years, reviving its Lincoln brand still
remains a challenge. Lincoln cars account for just 3% of Ford's
total unit sales. But luxury brands are an important component of
an automaker's operations due to their fatter margins.
Like a number of other luxury brands, Lincoln faces image issues
and doesn't appeal to the younger generation. One would normally
associate Lincoln with a granddad's luxury car. The new
millionaires, younger and more educated, prefer sportier and
swankier cars, something that the brand does not convey. Hence, the
new models will be sleeker and sportier as evidenced by the new MKZ
sedan. Three more will follow suit by 2016.
See our complete analysis for Ford
Associating With Sophistication
Besides introducing new models, Ford is training its Lincoln
dealers to go upscale. Recently, the company selected 60 of its
Lincoln salespeople learn more about the likes and dislikes of
intended buyers. Knowing about stuff like art museums or gourmet
food is all part of the package.
In Canada, there are no separate Lincoln dealerships and the
cars are sold along with the Ford brand, thus undermining its
exclusivity. Therefore, the company has started offering $100
dinner vouchers to prospective buyers as part of the overall
feel-good factor that the automaker intends to provide.
Furthermore, Lincoln showrooms will also be pumped with a
jasmine smelling scent, making customers feel that they have
entered the lobby of a five star hotel. All of these are part of
the company's efforts to reposition the Lincoln brand and better
connect with the tastes of the younger millionaires.
The U.S. automotive market has performed impressively in the
last few years with sales up 13% in 2012 and 8% in the first half
of 2013. With the sales figures now approaching pre-recession
levels, the growth rates will naturally slow down. Therefore, the
automakers are paying attention to their luxury brands since the
margins associated with such vehicles are heftier compared to
mainstream cars. GM has already had some initial success with
the Cadillac after the introduction of the new ATS and XTS last
year. The refreshed CTS and Escalade will follow shortly. Sales are
up 33% through July in the U.S. GM is on a mission to double the
Cadillac sales in 3-4 years beginning 2012.
Similarly, Honda is pouring in $1 billion to reinvigorate its
Acura brand after it lost favor with the American public. The
automaker already launched the refreshed versions of the RDX and
the MDX this year. Sales are up 7.4% through July, although the
growth has slowed down lately.
It is important for Lincoln to regain its popularity in the U.S.
since Ford also plans to launch the luxury vehicle in China by
2015. With competition in the Chinese luxury car market intense,
customers will not be too keen to buy a car that does not stand for
luxury in its home country, and so we believe that resuscitating
the American operations will help its Chinese operations as
Lincoln's annual sales stood at 98,000 units in 2012, and they
haven't really picked up in 2013. If Ford is able to able to double
the sales in the next few years (which is not all that unlikely
given its relatively small base), it could add ~$5 billion to
annual sales assuming an average sticker price of $50,000 per
vehicle. Furthermore, an operating margin of about 15% would yield
about $700 million in income before taxes, which is more than a
tenth of total operating income from the automobile division in
2012. And this does not even include the potential earnings from
China. So there really is a big incentive for Ford to revive its
We have a
$17 price estimate for Ford
, which is about 5% above the current market price.
Understand How a Company's Products Impact its Stock
Price at Trefis