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Ford Will Dethrone Toyota In This Important Segment

April 27, 2014 | About:
FinanceGuru

FinanceGuru

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Ford's (F) F-150 SVT Raptor has got all the credit it deserved as the pickup truck has been the best-selling vehicle in the U.S. for eight out of the last ten months. But now, let's turn our attention toward the 2014 model-year of Ford's Fusion. The 2014 Ford Fusion will be a big success due to three simple reasons.

The 2013 model-year Fusion was a huge success as it attracted many costumers and enabled the company to deliver the best hybrid sales in a quarter ever, even with inadequate supply.

Ford will make no such mistake again as the company started the production of the new Fusion at a second plant in the U.S., which will ensure that no such shortcomings occur in the supply of the 2014 Fusion.

The new Fusion will have better features with a negligible increase in the price in the base Fusion S and the mid-level Fusion SE models.

The improved productivity and huge demand will give the 2014 Fusion a fair shot at dethroning Toyota Motor's (TM) Camry sedan as the leader of mid-size car sales. Camry has led this sector for 11 years and it'll be quite a triumph if Fusion does indeed dethrone it.

Robust demand

When the 2013 Fusion was redesigned last year, it was an instant hit as hybrid sales in the second quarter were up 517% year over year. While mid-size vehicles are very traditional in terms of design changes and styling, Ford's gamble of experimenting with Fusion's style paid off as the company was able to sell 136,833 units.

Also, the average selling price (ASP) of the Fusion was $26,388 by the end of August, which indicated an increment of 4.4% year over year. This shows that demand for the Fusion was really high and the company may be able to sell 300,000 Fusions before the end of 2013. In addition to that, Fusion's ASP was roughly 10% above the Camry's and it won't be a surprise if Fusion leads the sales in the mid-size segment in the future.

Increasing supply

Ford recently bolstered the production of the Fusion by setting up a second manufacturing plant, and as a result, the sales of the car have increased more than 60% year over year. Ford started manufacturing the Fusion at its Flat Rock assembly plant earlier in August, which ultimately led to an increase of 30% in its production capacity. The cars produced at this plant will likely start arriving at dealerships before the end of October and will possibly help the company balance the demand-supply ratio. This step is also crucial because Ford will not like to face another supply shortage for the impending car-buying season.

Assuming that supply is in line with the demand, it'll be safe to say that the increased production will boost sales of the Fusion by a margin of 30%. This will also give Ford a shot at unseating Toyota's Camry for the first time in approximately 20 years.

How good is the Camry?

Shares of Toyota Motor have appreciated approximately 61% in the past one year and much of this can be attributed to the sale of the Camry, the Prius, and the RAV4. The company's sales increased 17% as it sold 193,394 vehicles and managed to outsell Ford. The Camry is still the top-selling mid-sized car in the U.S. and the company is working hard to keep its position intact. However, it may struggle to do so. Owners of Camry have reported many problems that are pricey to fix. The worst reported problems included:

  • Excessive Oil Consumption- Repairing expense: $1,526.
  • Defective Exterior Paint- Repairing expense: $3,000.
  • Transmission Failure- Repairing expense: $3,358.

Apart from these, customers have also reported about two potentially dangerous problems.

  • Vehicle Speed Control Issue.
  • Unexpected Airbag Deployment.

These issues will probably hurt Toyota's sales in the future and the company will have to work on these problems in order to defend its lead. Toyota expects to sell nearly 400,000 Camry units this year; therefore, it's almost certain that it'll retain its spot for now. But, with the competition heating-up, the lead is being narrowed down with the advent of the Fusion and Toyota will have to do more than keeping the prices of the Camry steady if it wants to cement its place as the market leader in this segment.

Conclusion

Ford has been on a roll and shares have appreciated an impressive 65% in the last one year. Given the company's terrific product development and the presence of hot selling vehicles such as the Fusion in the U.S. and the EcoSport in emerging markets such as India and China, investors can expect further growth in the future. Ford seems to mounting a serious challenge to the Camry now and if the Fusion manages to dethrone the leader, then investors will have more reasons to cheer. Hence, with a trailing P/E of just 11 and an estimated annual earnings growth rate of 14% for the next five years, Ford is still a good investment.


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