Morgan Stanley Highlights Three Big Issues with Ford's (F) Latest F-150

Morgan Stanley is out with some negative commentary on Ford's (NYSE: F) pride-and-joy: the F-150 pickup. The firm has Ford at Underweight with a price target of $24.

Analyst Adam Jonas noted that the F-150 could have an impact on Ford's near-term and medium-term profitability. He highlights three key points:

1. It's difficult to make, won't be easy to launch. Ford's new truck has been described to us by industry experts as one of the biggest capex projects in the history of the company. As we understand it, virtually everything that makes physical contact with the vehicle in the production process has been replaced, retrained or substantially augmented. From the reception of the aluminum in the factory there are unique considerations for temperature and humidity to prevent corrosion. The stamping process, while fundamentally the same internal architecture, undergoes special changes to tooling. The body shop is completely transformed from an autogenous welding operation (think sparks flying) to mechanical joining through riveting and other advanced bonding techniques (think robots forcing self-piercing, specially coated steel rivets through sheets of aluminum). The paint shop must contend with different coatings to prevent paint adhesion issues common with aluminum vehicles. This is not just a matter of running sheets of aluminum alloy through the same old equipment and out pops a new truck. Far from it.

Additionally, given the industry's unprecedented focus on initial quality in the wake of GM's record-breaking recalls (31 million and counting) investors must expect Ford to prioritize quality above all else to protect an F-series truck franchise it has nourished since 1948. We may remind you that some of Ford's recent (and far less complex) launches have been plagued with initial quality issues and high recall activity. The Ford Escape has been recalled 12 times since last year's launch. Many auto companies have successfully launched all aluminum vehicles, but nowhere near the combination of volume, price point and body configurations that Ford is attempting here. Many of the launch issues we are anticipating won't be fully measurable until Ford flips the onswitch for series production, ultimately hitting rates as high as 3,000 units per day.

2. The competitive response from GM and Ram will be fierce. When we engage in discussion with investors about the pricing dynamics for Ford's new truck in the forward year forecasts, we begin with a simple question: “What competitive response (incentive activity from GM and Ram) have you allowed for in your earnings model for Ford's new truck?” The majority of the time, there is simply no answer. Frequently, we are presented with this follow-up: “Why would GM or Ram want to spoil the party by unnecessarily raising discounts, particularly when the industry is capacity constrained?” We ask investors to remember what happened a year ago when GM was launching its all-new Silverado and Sierra into a US market that saw Ford flooding dealerships with amply supply of its 2013 and 2014 trucks with elevated discounts. There is no question that Ford's competitive actions last year had a detrimental impact on the launch of GM's new truck for several months. It's payback time. The loyalty trade-in incentives have already begun at GM with last month's highly successful 'Truck Month', giving existing Chevy and GMC Truck owners another reason to stay within the fold before facing the cognitive dissonance of moving to Ford's all aluminum baby. Expect the same treatment from Ram. And look for the conquest incentives to begin towards year end and into 2015--the meat of Ford's launch phase. Going forward, look for GM and Ram to bring forth engineering tweaks to their existing products to narrow the fuel economy gap to Ford. Why would GM and Ram do all of this? Well, why would Ford bet so much on such a radically new application of material science, vehicle engineering and production? One word: Survival. It's Hunger Games in US autos.

3. Ford has bet the ranch on higher-for-longer fuel prices. But with $3 gas, what's the 'why buy'? Ford hatched its audacious truck strategy at least 4 or 5 years ago during a time of higher and more volatile fuel prices. Just think of the fundamental changes in energy markets in just the last few years with respect to domestic supply of oil and gas, changing demand patterns and the growth of renewables. Our discussions with auto dealers suggest that fuel economy has dropped significantly down the consumer's priority list in the US market from what was clearly a #1 issue back in 2010 or 2011. This is important when trying to assess why consumers might pay thousands more to buy Ford's new truck vs. the previous generation or other competitor products on offer. We fully expect Ford to advertise a 30 mpg highway fuel economy figure for its most fuel efficient version of the 2.7L twin turbocharged F-150. But what will be the fuel economy advantage of the specific truck that YOU want and how high will fuel economy rank on your priority list?

For an analyst ratings summary and ratings history on Ford click here. For more ratings news on Ford click here.

Ford closed at $14.10 yesterday.

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