South America’s Contribution to Ford’s Stock Value

Ford Motor Co. (NYSE:F) reported 2010 full year net income of $6.6 billion, which was its highest net income in more than 10 years. We currently estimate Ford’s international operations contribute 35% to its stock price – almost similar to its North American operations (both cars and trucks together) that contribute almost 36%. In 2010, Ford’s South American operations contributed 8.3% to its total automotive sales of $119.3 billion (up 0.6% from 2009). We expect that international operations will become increasingly more valuable for Ford. 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 42% above the current market price.

In this second article of a series, ^[1] we will take a closer look at South America, especially the following six countries – Argentina, Brazil, Chile, Colombia, Ecuador and Venezuela, which are the most important markets for Ford in this region.

South American Automotive Industry

Within the above mentioned six South American countries, total automotive industry sales have been growing by an average rate of 12% every year since 2006, and reached 5 million units in 2010. From 2009 to 2010, the industry sales growth in these markets was 19%.

Of these six South American countries, Brazil, Argentina, and Venezuela are Ford’s principal markets in South America. In Brazil, the largest market in this region, total automotive industry sales in 2010 stood at approximately 3.5 million units, up 11.9% from its 2009 levels. Total automotive industry sales in 2010 were 655,000 units in Argentina – up 28.7% from 2009, and 126,000 units in Venezuela – down 7.4% from 2009.

Ford’s Share of South American Markets

Ford’s overall market share in the six South American countries decreased by 0.4% in 2010 and reached 9.8%. Of these six countries, Brazil witnessed combined car and truck share for Ford−brand vehicles increasing by 0.1% from its 2009 levels and reaching 10.4% in 2010. During the same period, Ford’s vehicle market share in Argentina dropped 0.9 percentage points (ppt,) to reach 12.4%, and in Venezuela it slipped 2.4 ppts. to reach 18.5%. Combining total industry vehicle sales and Ford’s market share, Brazil is the most important regional market for Ford.

Brazil’s automotive market has more than doubled since 2002. The major drivers for this growth have been economic environment and demographics, relatively low inflation in recent years, growth in per capita income, low vehicle ownership rates and a young population. We expect that these favorable factors will continue to help the expansion of automotive market in Brazil over our forecast period.

Rising Costs Due to Emissions Standards

In South America, Brazil, Argentina and Chile are introducing more stringent emissions standards. Brazil approved Euro V emissions and OBD standards for heavy trucks starting in 2012, which most heavy vehicle manufacturers will use urea SCR – a technology that helps take the carbon dioxide out of diesel exhausts. More stringent light vehicle limits will come into effect in 2012.

Also, South American countries are implementing requirements for features such as airbags, safety belts, and anti−lock braking systems (“ABS”) consistent with U.S. and European requirements. Examples of more stringent safety requirements in South America include the approval in Brazil of more severe impact requirements, the mandatory use of front airbags and ABS, and the introduction of mandatory vehicle tracking and blocking systems.

These could likely increase the cost of technology for Ford’s models and negatively impact its operating margins.

Government Incentives for Local Production

Sensitivity of Market Share

Based on our current estimates, we could see a further 3% upside from our current price estimate for Ford from a 0.50% change in market share. You can modify the charts above to make your own forecast.

See our full estimates for Ford.