Why I'm Not Worried About Ford's July Sales Decline

F Chart

2018 has been a disappointing year for Ford Motor (NYSE: F) , which recently cut its annual earnings forecast due to a variety of headwinds. The company is suffering from weak sales in many international markets. Meanwhile, in the U.S., strong demand for its F-Series trucks has been more than offset by sales weakness and low margins impacting many of its other high-volume models.

While shares of crosstown rivals General Motors and Fiat Chrysler (NYSE: FCAU) are both nursing single-digit percentage declines year to date (as of Aug. 1), Ford stock has plummeted about 20% in 2018.

Automaker year-to-date stock performances, data by YCharts .

At first glance, Ford's July U.S. sales report provides more cause for concern. Ford reported a drop in deliveries and an even bigger decline in retail sales. However, given how dated most of Ford's vehicle portfolio is, investors shouldn't worry too much about its near-term sales trends. As new models arrive over the next two years, results should improve dramatically.

A dismal month

Ford's U.S. vehicle deliveries totaled 194,026 last month, down 3.1% year over year. This came despite a 25.7% surge in fleet sales, driven by order timing, which created an easy year-over-year comparison. For example, domestic deliveries of Ford Transit vans nearly tripled in July after rising a far more modest 7.5% in the first half of 2018.

Meanwhile, retail sales wiped out, falling 10.4% year over year in July. As usual, the bulk of the sales pressure came on the car side of the business. Most notably, Ford Focus sales fell by nearly half -- which shouldn't have been surprising, given that the company ended production of that model for the U.S. market in May. Dealers are just selling down the remaining inventory.

However, Ford's crossover/SUV sales also slipped modestly last month, despite the addition of a new model (the EcoSport) earlier this year. Sales of the Ford Escape -- the Blue Oval's second-highest-volume model -- plunged by more than a quarter.

By contrast, Fiat Chrysler continued sailing along in the U.S. last month. Total deliveries and retail sales both increased about 6% year over year. Fiat Chrysler owes its success in the U.S. to the red-hot Jeep brand. Jeep sales rose 15% last month (including a 16% increase at retail), accounting for more than 100% of Fiat Chrysler's increase in deliveries.

Ford needs new models badly

Ford's current struggles can be traced directly to the weakness of its current product lineup. The current version of the Escape first hit dealer lots six years ago. That makes it due for a complete redesign to reinvigorate sales.

The Ford Explorer -- another key product -- has gone even longer without an all-new model. Together, the Escape and Explorer models account for about 40% of Ford's non-truck/van sales volume.

Ford also has some gaps in its product lineup. Its decision to stop building the Ranger midsize pickup for the U.S. market back in 2011 seemed sensible at the time. However, it ended up being a mistake, as the midsize truck segment has experienced a resurgence in recent years. Meanwhile, Ford doesn't have a true off-road SUV despite its heritage in that area. This has allowed Fiat Chrysler's Jeep brand to corner the market.

Improvement is on the way -- but not in 2018

The good news for investors is that Ford is in the early stages of a major product refresh cycle in the U.S. New versions of the Ford Expedition and Lincoln Navigator have sold well and brought in much higher average transaction prices (ATPs) than the previous models. The EcoSport subcompact crossover has also gotten off to a solid start.

In 2019, Ford will roll out all-new versions of the Escape and Explorer -- its two highest-volume models in the crossover/SUV market. It will also reintroduce the Ranger midsize pickup next year, while broadening the Lincoln brand's SUV lineup by relaunching the Aviator nameplate. The new Focus Active -- which sits somewhere between a crossover and a hatchback -- is also set to reach dealer lots next year.

More help is coming in 2020, highlighted by the reintroduction of the Ford Bronco off-road SUV. This product cycle should drive solid growth in Ford's crossover and SUV sales over the next couple of years, while also lifting ATPs substantially.

In the short run, Ford may continue to report delivery declines in the U.S. as it phases out other car models. Production of the Fiesta and Taurus models for the domestic market is set to end in the first half of 2019. But even with lower volume, profitability should start to improve, thanks to a stronger mix. And a volume recovery could come in late 2019 or early 2020, as the benefit from strong crossover, SUV, and truck demand starts to offset the headwind from exiting most of the car market.

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Adam Levine-Weinberg owns shares of Ford and General Motors. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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