Buy Long As Ford Handles Short-Term Headwinds To Make Way For Future Success

Ford Motor Company (F) engages in the development, manufacture, distribution, and service of vehicles and related parts worldwide. The company operates through two sectors, Automotive and Financial Services. Summer marked Ford’s sluggish stock activity. However, in the last 6 weeks it bounced back and is set to continue climbing up.

Q3 Outlook

North America is still Ford’s largest stronghold while Europe is a hitch.

2014 projections suggest continued growth and fair margins for the company. The company’s operating margins over 10%, one of the highest in North America. Ford Focus and Ford Escape have been successful. Sales have grown in the last few years. Since January, Ford has sold roughly 182,000 units of the Ford Focus, compared to 169,000 in the same period in 2011. Ford Escape has been sold 177,000 times compared to 167,000 over the same period in 2011.

Ford has also recently raised their forecast for 2012 total U.S. auto sales, and they now expect sales to be between 14.5 million to 15 million vehicles from the prior estimate of 13.5 million to 14.5 million. Ford currently has a 16% market share in the US.

Ford is currently seeing advancement on the cost component of its European turnaround plan. The turn around in Europe will require a heavy product component that the company recently unveiled. The company is cutting hundreds of salaried workers by offering buyouts, cutting temporary positions, and outsourcing services. Sales are down by 7% in Europe this year. Losses amounted to $404 million in the second quarter and losses are expected to top $1 billion this year. Morgan Stanley (MS) projects a $1.5 to $2 billion loss for Ford in Europe.

Since 2006, Ford has invested $6.7 billion into the Asia Pacific region. Ford expects 60% of the industry’s growth from this region by 2020. China is Ford’s prospects for six plants, two in India and one in Thailand. These will produce a total of 2.9 million vehicles within the next four years. Ford projects 15 new vehicles in China by 2015; around 95% of the region’s vehicles on global platforms and twice the number of dealerships within four years.

PROFITABILITY

Ford’s recent earnings release reported that total annual revenue declined to $33.2 billion from $35.5 billion. Total annual expenses decreased to $31.7 billion from $33.3 billion. Second quarter operating income decreased to $1.32 billion from $1.87 billion from the same quarter last year. Net income decreased to $1.04 billion from $2.39 billion last year. Ford’s gross cash increased by $800 million at the end of the first half, down from $1.5 billion. Net income decreased from lower operating results and higher tax expenses. The decrease in revenue was mainly due to lower sales in Europe, as well as South America and Asia Pacific.

Ford’s decrease in market share is due to increasing competition from automakers recovering from the 2011 tsunami, as well as discontinued models like the Ranger and Crown Victoria. Ford’s outlook for North American sales in 2012 remains unchanged. Ford expects earnings in Asia Pacific to improve from additional capacity in China and Thailand, as well as the new Focus and new Ranger launches.

STOCK VALUATION

Ford is currently trading at P/E of 2.30 times and forward P/E of 6.86 times. Toyota, Honda and General Motor’s P/E are 16.85 times, 13.90 times, and 6.31 times respectively. Ford’s PEG is at 0.31 times. These are fairly low figures compared to Toyota’s PEG of 0.40, Honda’s 0.44, and General Motor’s 0.80.

Ford is currently trading around $10.16. This is -21.29 percent of the 52W high and 15.71 percent of the 52W low. Analyst’s mean target price is $13.50 for the year. Based on Ford’s bullish activity recently, we agree that Ford stock price is bound to pick up in the coming periods.

We recommend Ford as a buy. Ford has a substantial market share in the US. With it’s Europe turnaround strategy in progress, lay-offs, and cutbacks on unprofitable models, Ford is making room for bigger margins and paving the way for a better, more profitable future. Ford might be faced with obstacles in the short-term but its future outlook are very promising.

RECENT NEWS

Tuesday, October 2, 9:41 AM Ford (F) September U.S. sales: -0.1% to 174,976 vehicles, roughly in-line with the estimates of analysts as small cars sold well but trucks lagged. Passenger car sales were up 1.6% to 50,694: Fusion -37.0% to 12,300, Focus +91.4 to 19,736, Mustang -12.2% to 4,439. Utilities +8.7% to 67,657: Escape +14.5 to 23,148, Explorer +18.7% to 13,453. Trucks -7.6% to 67,657.

Tuesday, October 2, 7:59 AM General Motors (GM) and Ford (F) will announce next month that they will work together to study and develop new automatic transmissions designed to improve fuel economy. By joining forces, the automakers can split the investment costs for the development of gearboxes with 8, 9, and 10 speeds that could be the future of transmissions.

Friday, September 28, 5:07 AM Hit by slumping European sales, Ford (F) and other automakers are boosting numbers through “self-registrations” in which dealers sell cars to themselves and then offload the vehicles to customers as second-hand cars for big discounts. The practice accounted for 30% of industry sales in Germany from Jan-Aug, says Ford Europe exec Roelant de Waard, who was speaking ahead of the Paris Motor Show, which officially starts tomorrow.

Thursday, September 27, 2:44 PM September U.S. auto sales preview: Edmunds.com forecasts September U.S. car sales will increase 8.8% from last year but fall short of the level seen in August. The firm sees Chrysler (FIATY.PK) leading U.S. automakers with a 8.4% gain while General Motors (GM -0.6%) and Ford (F +0.6%) should show more modest growth of 1.9% and 0.7%, respectively. Japanese automakers Toyota (TM +2%) and Honda Motor (HMC +1.5%) are expected to show outsized gains due to the effect of last year’s production slowdown, while Nissan (NSANY.OB) is pegged to show a sales dropoff. Most industry watchers still see annual U.S. sales of cars and trucks to come in at around 14.4M-14.5M.

Thursday, September 27, 9:04 AM The Paris Auto Show gets off with a bang as PSA Peugeot Citroen (PEUGY.PK) CEO Philippe Varin warns the industry is in the eye of a hurricane with sales expected to fall again in 2013. His most telling remark (so far): “We’re working on the assumption that the market has hit a plateau for the coming three years, so that 2015 is not going to look very different from 2012.”

Thursday, September 27, 6:55 AM Ford (F) intends to wrap up its buyout plan for European salaried workers by the end of the year, according to Europe head Stephen Odell. The exec, currently in France for the Paris Auto Show, also noted that a growing belief exists in the industry that European demand won’t snap back as fast as originally forecast.

Thursday, September 27, 5:00 AM Chrysler becomes the last of the three main Detroit carmakers to agree to a new four-year labor contract with the Canadian Auto Workers union and avert a strike, but as with GM (GM) and Ford (F), it’s unable to reduce the cost gap between U.S. and Canadian workers. Chrysler’s CAW staff will vote on the deal at the weekend, while GM employees are due to finish voting today on their new agreement.
Monday, September 24, 4:58 AM Ford’s (F) Canadian Auto Workers employees overwhelmingly ratify a new four-year labor agreement forged by the carmaker and the union, which represents 4,500 workers in Ontario. Under the deal, which Ford says brings “significant cost-savings,” the company could create up to 600 jobs through adding another shift and “a product based on a new global platform.”

Thursday, September 20, 9:21 AM Credit Suisse puts itself out on a limb by calling out General Motors (GM) as a more attractive investment proposition than Ford (F) with a robust product cycle slated for 2013 and 2014. GM execs outlined yesterday at an investor conference how its product lineup will be almost completely turned over by 2016, while Ford seems to be making bigger bets that reworked models such as its Fusion sedan will create a splash in the market.