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Ford's Profit Can Soar Thanks to Fresh Products in the Right Segments

Adam Levine-Weinberg, The Motley Fool

Over the past year, Ford Motor (NYSE: F) has embarked on a huge strategic shift. Rather than trying to remain a "full-line" automaker with products in every major market segment, Ford is focusing on the types of vehicles that customers want most. Moreover, by slashing investment in less popular segments of the market, Ford will be able to maintain a fresher product portfolio going forward.

This strategy could potentially lift Ford's earnings by billions of dollars annually within a few years. In a recent investor presentation, management revealed some more details about the company's long-term plans. Let's take a look.

Traditional sedans and hatchbacks are not the future

It's no secret that auto demand is shifting quickly from cars to crossovers, SUVs, and trucks. Just in the last four years, cars have fallen from 57% to 47% of auto deliveries globally. In the U.S., the shift away from cars is even further advanced -- and still continuing.

Furthermore, it's very tough to produce cars profitably. Margins for crossovers, SUVs, and trucks are much stronger. As a result, the most lucrative parts of Ford's business collectively produce 150% of the company's operating profit, as Ford executives have noted in several recent presentations. Those profits are being partially offset by losses in the car market.

A gray Ford Focus on a street in front of a building

Demand for traditional cars is plummeting. Image source: Ford Motor Company.

This led to a dramatic decision by Ford last year to eliminate its entire lineup of traditional cars in the domestic market. Ford stopped building the Focus and C-MAX models in the U.S. last year. The Fiesta and Taurus are being discontinued in 2019, followed by the Fusion in a year or two. The Mustang is the only Ford car model with a long-term future in the United States.

Ford is moving away from cars outside the U.S., too. In its presentation last week, the automaker indicated that it will allocate just 9% of its spending to cars over the next five years, compared to 36% of its spending over the prior five-year planning period. That represents a slightly more aggressive shift than what Ford had been planning just eight months ago when it said it would devote 11% of its spending to car models in the 2019-2023 period.

Out with the old, in with the new

While Ford is getting rid of most of its car lineup, it's simultaneously expanding its crossover, SUV, and truck offerings. Last year, it brought the EcoSport subcompact SUV -- which had already existed in various international markets -- to the U.S. The EcoSport got off to a good start, with 54,348 domestic deliveries last year -- more than several of Ford's car nameplates. Furthermore, sales doubled year over year in the first quarter of 2019.

A red Ford EcoSport on a city street

The EcoSport was the first of several new models Ford is bringing to the U.S. Image source: Ford Motor Company.

More new models are coming in 2019 and 2020. Most notably, Ford reintroduced the Ranger midsize pickup in the U.S. earlier this year and will bring back the Bronco off-road SUV next year. A smaller off-road SUV and a high-performance Mustang-inspired electric car are in the works, as well.

The Ranger and Bronco are being produced at Ford's Michigan Assembly Plant, which was building the Focus and C-MAX up until last year. Ford said on Wednesday that shifting to the new, more in-demand models should lift the operating profit generated by that one assembly plant by more than $1 billion annually by 2021.

Greater focus means fresher products

Getting out of unprofitable car segments and adding more crossover, SUV, and truck models is likely to be the biggest driver of profit growth for Ford in the next few years. However, the Blue Oval is also set to benefit from maintaining a fresher product portfolio.

In addition to relaunching the Ranger pickup in the U.S. this year, Ford will also start selling all-new versions of the Escape and Explorer. Those two nameplates accounted for 59% of the Ford brand's crossover and SUV sales last quarter, but both models have become quite stale and could be doing even better.

These new product launches and the discontinuation of aging car models will reduce the average age of Ford's U.S. passenger vehicle portfolio from roughly 5.5 years between 2016 and 2019 to just 3.3 years in 2020. Furthermore, by focusing on fewer models, Ford will be able to update them more frequently. As a result, the automaker expects the average age of its domestic passenger vehicle portfolio to remain between three years and 3.5 years through 2023.

Not surprisingly, fresher products tend to sell better -- and at higher prices. By focusing its vehicle-development efforts on the most lucrative parts of the market and updating its products more frequently, Ford could surprise investors with strong profit growth in the coming years.

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Adam Levine-Weinberg owns shares of Ford. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .