Ford Is Scrapping Used Cars – Is It Worth It? – Ford Motor Company (NYSE:F)

I recently wrote an article highlighting what I thought was important for Ford Motor Company’s (F) growth prospects. While the focus of my previous article was on long-term growth opportunities, recent news from the automobile maker got me thinking about a short-term growth prospect.

Buying Scrap

On August 22nd, news broke of Ford’s new incentive program for its U.K. buyers. Ford is offering buyers between 2,000 and 7,000 pounds to trade in any brand of used car/van that was registered before 2009. The new incentive program some-what mirrors BMW’s and Vauxhall’s trade-in programs from earlier this year, however Ford plans to scrap all vehicles that are traded in. In return, Ford is hoping to 1) eliminate high-pollution vehicles and 2) drive up new car sales in the U.K. Ford’s most recent Q2 revenues were disappointing for Europe. The company reported revenues of $7.1 billion, a decline from the $8.1 billion in Q2 of 2016- down about 12%. Ford primarily attributed these declines to effects from Brexit, weak launches of the new Ford Fiesta, and higher commodity costs. Ford’s new incentive program however shows that the company’s management team is taking last quarter’s losses seriously.

Ford Fiesta ST five-door launched in UK

The Payoff

Ford currently holds a large share of the European car market due its best-selling Fiesta (car) and Transit Custom (van). Ford currently has 4 models in the U.K. top-20: Focus (1st), Fiesta (4th), Transit Custom (7th), and Kuga (12th). For the month of July, Ford also claimed the top overall spot for U.K. sales with its Ford Transit. The new incentive programs makes perfect sense for Ford as the company continues to look for new ways to grow revenues. The company can hopefully attract buyers to the Fiesta among other models to help boost its slumping sales. Additionally, Ford can look to attract customers who are not currently driving Ford vehicles- a move that could see the company increase its market share even more.

For the purpose of this article, I wanted to analyze the potential payoff of the new incentive program for Ford and see if it could potentially drive up slumping European revenues. Ford’s YTD car sales in the U.K are currently 185,250 according to the The Society of Motor Manufacturers and Traders (SMMT). This number puts Ford 61,235 registrations ahead of its nearest rival. Ford also holds 10.45% of the U.K. market- the highest market share of all manufacturers. So does an incentive program to attract new buyers to Ford really make sense for the American automobile manufacturer? I think yes.

Despite Ford’s current market share, the company still reported declining revenues due to a lack of incentives and economic pressures after Brexit. Ford needs a new program to help promote sales or else its market share in Europe could quickly decline. The pressure from governments to reduce emissions is also a perfect excuse for Ford to initiative a plan such as this. Removing the most-polluting vehicles in the U.K. market is an ideal incentive for Ford to start this incentive program in the first place. The below table is a breakdown of all of Ford’s current vehicle offerings in the U.K. Even the most basic model, the Ford KA+ still has an upside to this incentive program to where no matter what, Ford is bound to make money in one way or another. Please keep in mind that not all vehicles below will be part of the incentive program. However, for the sake of this article I thought it was important to highlight that Ford can likely benefit no matter what from this. Now, investors do have to obviously take into consideration the costs to manufacturer these vehicles, and also any leeway for additional incentives, but its right to assume that the costs shown below also likely take these into consideration. After all, automobile manufacturers often price cars slightly higher due to incentives dragging prices down.

However you interpret the above table, I think it is easy to conclude that even the smallest percentage increase in sales will have a positive impact on European revenues for Ford for the third quarter. Ford’s management’s approach to short-term revenue growth opportunities lies in incentive programs like this as the company plans for the long-term. Innovative programs like this will not only help Ford maintain its market share but also help the American automotive company attract new customers.

Ford: Still Going Long

I mentioned in my last article about Ford that I thought it would be wise of investors to take a long position in the automaker. Ford’s management has taken the necessary steps to ensure the company continues to innovate in an evolving market under constant pressure from governments and new-entrants like Tesla (TSLA). The new incentive program is another step in the right direction for me. Ford’s management clearly acknowledged its decline in European sales over the last year and hopes to see that improve by way of this incentive program.

I am still long the Ford motor Company. Let’s all now look forward to see how Q3’s European revenues look!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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