Ford Cruising in Right Direction Despite Earnings Speed Bump

Ford (NYSE:F) reported 2010 full year net income of $6.6 billion, which was its highest net income in more than 10 years. This solid performance was largely due to Ford’s strategy to focus on its core brands and Ford’s decision to borrow $23.6 billion in 2006. Along with providing a cash cushion during the global crisis that affected the automotive industry severely, this money enabled Ford to launch new lines of fuel-efficient vehicles faster than its competitors. Ford competes globally with automakers like BMW (GR:BMW), GM (NYSE:GM), Daimler (ETR:DAI), Audi (NSU:GR), Honda (NYSE:HMC), Toyota (NYSE:TM) and others.

We have a price estimate of $20.59, which is around 27% above the current market price.

Ford was the only American automaker that survived the automotive crisis without a government bailout, which helped Ford in improving its reputation vs. its domestic competitors and helped it fend off foreign car makers that took advantage of the crisis to grab market share.

…But Q4 Results Were Weaker than Expected

In the fourth quarter of 2010, Ford earnings dipped primarily due to lower sales volume in Europe and higher commodity costs. Lower sales volumes in Europe were driven by Ford’s focus on maintaining profit margins and its decision to reduce its participation in certain low margin businesses.

Financial services income also decreased in the last quarter primarily on lower volumes, and operational costs increased to support new product launches and raw material costs rose due to the global economic recovery.

However 2011 looks promising…

Ford plans a strong product line-up to keep the vehicle portfolio fresh and so we are optimistic going into 2011. The higher operational costs in 2010 have enabled Ford to unleash a new wave of vehicles with new technologies in 2011.

In Europe it plans to launch several new models including zero emission electric vehicles like the new Focus Electric, Ranger Wildtrak and Vertrek SUV concept. Ford will also launch the next-generation of hybrids, the Kuga and the C-MAX Energi, and these will help keep Ford drive sales and maintain one of the newest product line ups in the industry.

Strong growth in emerging markets like China, India, Brazil, Turkey will also provide growth opportunities. In 2010, Ford India recorded a jump of 184% in sales to reach 83,887 units. In China, Ford increased its sales in 2010 by 40% reaching a smacking 582,467 vehicles after expanding its dealer network. With demand for automobiles in developing economies set to grow, Ford will benefit from its strong presence and performance in most of these countries.

Below you can see our market share forecasts for truck and car sales.

Auto makers should continue to do well as long as interest rates remain low and the economic recovery remains intact. Low interest rate policies in the U.S. and Europe will help support growth as most economists expect short term rates to stay low in the foreseeable future. Low interest rates help in increasing Ford’s vehicle sales volume through increased vehicle financing because of lower borrowing costs.

Based upon the above analysis, increasing the forecasted growth of Ford international market share, Ford car market share in North America, and Ford truck market share in North America by an additional 0.2% for each forecast year will result in close to 10% further upside for Ford. You can modify the charts above to make your own forecast.

See our full estimates for Ford.