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Investment Overview for Ford (NYSE:F)
Ford Motor Company is a global automotive company headquartered in Dearborn, Michigan, USA. It manufactures and distributes automobiles across six continents. It is currently the fourth largest automaker in the world, based on the number of vehicles sold annually. With about 224,000 employees and about 90 plants worldwide, the company’s automotive brands include Ford and Lincoln. The company provides financial services, such as vehicle leases and loans, through the Ford Motor Credit Company.
Below are key drivers of Ford's value that present opportunities for upside or downside to the current Trefis price estimate for Ford:
- Lincoln Growth Rate:
Luxury car brands contribute nearly 20% in revenues and 33% in profits, despite only totaling 10% in sales in the worldwide car market. As a result, it is highly important for a company’s profitability to run a successful and competitive luxury car brand. However, Ford's premium brand Lincoln is extremely uncompetitive with leading luxury car brands like Mercedes-Benz, BMW and Lexus, selling less than 1/3rd the number of units each year compared to these brands. However, with the launch of the Lincoln Continental and the brand's entry in China, it is targeting sales of 300,000 units each year by 2020. To achieve that target, Lincoln would have to grow by 20% each year over its 2015 sales of close to 120,000 units. If the brand can do that, our target price for Ford would increase by 18.2%.
- Ford's Truck Price in North America:
In recent years, sales of SUVs, Crossovers and Trucks have experienced a boom in the U.S. Ford has been helped by this trend, leading to record profits in 2015. Ford's F-series trucks, particularly the F-150, has been the highest selling vehicle in the U.S. for the last 34 years consecutively. This shows that the truck has an extremely loyal consumer base, basically a captive market for the company. Last year, the company launched a new 2016 version for the truck, whose body is made from aluminum instead of steel. Aluminum is lighter than steel and results in trucks with more fuel efficiency and better handling. As a result, we forecast Ford's average truck price in North America to grow by 0.3% for the rest of our forecast period. In 2015, the price grew by 3.4%. If Ford can keep up this growth rate for the rest of our forecast period, our target price for Ford could increase by close to 20%. Instead, if the truck price declines by 2% for the rest of our forecast period, the target price would decline by 11%.
Volvo's sale to Geely
In August 2010, Ford Motor Company sold Volvo Car Corporation, the Sweden-based premium automaker to Geely, a Chinese motor manufacturer, for $1.8 billion, only a fraction of the $6.45 billion that it paid for the company in 1999. The actual cost to Ford is worse, considering the fact that it had to support Volvo through years of losses and even after the completion of the acquisition it faced a number of expenses which consumed much of the value.
The decision to sell came in response to the significant decline in the global auto industry and the severe economic instability worldwide. The strategic review of Volvo is in line with the broad range of actions taken by Ford to strengthen its balance sheet and to ensure resources for implementing its product-led transformation plan.
Geely had its plan to revive the brand by lowering manufacturing costs and tapping the booming Chinese luxury car market.
Ford officially killed the Mercury brand
In June 2010, Ford announced its plan to shut down the 71-year old Mercury brand, to give more attention to its mainstream Ford brand as well as the luxury Lincoln brand.
Originally, Mercury was supposed to give Ford a mid-priced car that fit between the inexpensive Ford models and its luxurious Lincolns, but sales in the U.S. have dwindled in the past decade and Mercury seems to have developed an identity crisis.
According to Edmunds.com CEO, Jeremy Anwyl, Mercury is a brand that has lost its meaning in the American automotive marketplace and isn't worth trying to change.
Over the last few years, while Ford saw its market share in the U.S. rising to 16%, Mercury remained restricted to just 0.8% of the U.S. market.
'One Ford' vision to keep costs under check
Ford has historically maintained a heavy focus in North America, claiming that higher income U.S. consumers buy more often and tend to buy upscale. However, North America's once significant lead in international unit sales has all but disappeared, and more importantly, growth in cars sales in the BRIC countries continues to grow quickly.
How Ford manages to take advantage of this trend will be decisive to the company's long-term growth. As discussed above, Ford's current international plan is the "One Ford" campaign, which seeks to save production and design costs by producing a single fleet of vehicles for all markets worldwide. The first fruit of this scheme was the new Ford Fiesta, which was developed by Ford Europe, but was sold in all Ford's major markets, and Europe's iconic Ford Transit van, which was introduced in Asia and the U.S. in 2009.
We believe this will lead to:
- Better advertising, marketing, and communications programs to launch Ford cars globally in all markets.
- Accelerate the development of new products under the “Ford” brand.
- Aggressively restructuring of the balance sheet by selling other brands and using these proceeds for the “Ford Brand.” Ford has sold Jaguar, Aston Martin, Saab, Land Rover, and Volvo within a span of 3-4 years.
- Standardization of processes and reducing costs.
- Reducing the production cycle time for Ford cars and bringing the time closer to its Japanese rivals.
This trend is important as the stock price is sensitive to the following drivers:
- Automotive division gross margins
- Vehicle lease and loans EBITDA margins
- SG&A as a percentage of revenue.
As political pressure mounts for a greener economy, the future of Ford's main sales are centered on fuel-efficient vehicles.
Traditionally, Ford's most profitable vehicles have been large SUVs and pickup trucks. However, volatile oil prices and political pressures for more fuel-efficient cars have taken a toll on the market for larger vehicles.
Ford plans to produce more fuel-efficient cars, changing both its North American manufacturing plants and its line-up of vehicles available in the U.S. In terms of North American manufacturing, the company plans to convert three existing truck and sport utility vehicle (SUV) plants for small car production. This offers the advantage of quickly bringing high demand, fuel efficient, cars to the U.S. market, without having to invest money and time to create an entirely new automobile. In terms of product mix, it plans to call for more crossover SUVs, compact cars, and hybrid vehicles.
This trend is likely to affect the market shares for the automotive division in North America and international markets.
Restructuring, consolidation, and other trends:
- Strengthening the U.S. supply base
- Supporting the dealer network
- Reducing salaried personal costs
- Investing in fuel economy and advanced technologies
- Accelerate electrification including next generation hybrids and all-electric vehicles.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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