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Investment Overview for Ford (NYSE:F)
Below are key drivers of Ford's value that present opportunities for upside or downside to the current Trefis price estimate for Ford:
Ford Trucks North America
Total Number of North America Car Sales: Ford's F-150 series of pickup trucks is the highest selling vehicle in the U.S. Its sales depend on the overall strength of the U.S. car market.The U.S. automotive market has showed strong signs of resilience in the last few years.
After experiencing a dip during the financial crisis, it started recovering in 2011 and registered a 10% growth in vehicle sales to reach approximately 13 million units. The trend continued in 2012, as 14.5 million vehicles were sold during the year. 2013 was also a strong year for the automotive market as vehicle sales jumped to 15.9 million units. In 2014, the sales growth slowed down to 5.9% as the number of vehicles sold rose to 16.8 million units. The robust sales growth could translate into better revenue realization for Ford in the U.S., which is the most critical market for the company.
If the number of trucks sold in North America increases to 14.0 million by 2020 instead of the 11.7 million that we currently forecast, there could be a 10% upside to Ford's stock price.
Ford Cars & Trucks International
Ford International Market Share: Europe has been going through the toughest time since the adoption of a single currency in 1999, and the economic crisis that started in Greece has spread through other peripheral countries as well. The economy is still in distress and the governments across Europe are adopting austerity measures to ride through the situation, which is not going to help the industry, either. Vehicle sales are still below their pre-recession levels. However, in 2014 the European car market posted its first increase in year-on-year sales since 2009, selling 13 million units.
If Ford is able to increase its international market share to 6% by 2020, from the 5.5% that we currently forecast, there could be an upside of about 5% to Ford's stock.
Going forward, a worsening situation in Europe could prove to be a major detriment for the company.
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.
Ford's vehicle financing business, consisting of leased vehicles and vehicle loans, has become the most valuable business segment, surpassing the international cars and trucks business of Ford. It has taken a big leap towards becoming a great cash cow for the company. The international cars and trucks business still holds an edge over the North American business segment for Ford. It's slightly more valuable than the combination of Ford's North America trucks and North America cars businesses.
International vehicle market 3.5x larger than the North America vehicle market:
2014 vehicle sales in North America were about 20.2 million. In comparison, there were approximately 3.5x as many vehicle sales (around 67 million) internationally. We estimate that Ford will be able to maintain its global market share to approximately 7% and continue to grow in North America (Ford trucks and cars and Lincoln combined).
North America share in trucks higher than the share in cars
In 2014, Ford had about a 14.2% share in the North American vehicle market. About 9% of this was attributable to Ford trucks, with the remainder attributable to Ford-branded cars. With the shift in trend in consumer preferences towards smaller cars due to rising fuel prices over recent years, the overall share in North America of vehicles might decline for Ford. However, the drop in fuel prices over the past year could be a positive.
Vehicle financing business driven by high margins
Ford leases around 1 million vehicles annually from which it earns about $8.5 billion per year in revenue (about $700 million per month).
As of December 31, 2014, the company also had ~$76 billion of vehicle loans outstanding, from which it earns an average interest rate of 6.8%.
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.
Trefis Forecast Rationale for Ford Car Market Share in North America
This represents Ford's market share in the North American car market based on the number of units sold.
Ford's car market share jumped from 8.8% in 2009 to 10.8% in 2010. In 2011, the market share rose to 11.9% partly helped by weak performances by Japanese automakers, who were hit hard by the Tsunami. In 2012, Ford's market share fell to 10.5% as the Japanese automakers recovered from their production and supply constraints experienced in 2011. In 2013, Ford's car market share rebounded to 11.2%. In 2014, Ford decided to change the choice of material of the body of its F-series trucks from steel to aluminum. As a result, it shutdown two of its plants to allow for their retooling and most Ford dealerships operated with low inventory, thus reducing their sales. Ford lost market share as a result of this, which stood at 9.6%. Going forward, we expect Ford to recover its market share.
In the medium-long term, we see Ford's car market share in the North American region at 11-11.5%.
Trefis considers the following factors for its forecast:
- Smaller fuel efficient cars & new product launches by Ford to increase car sales
- Ford is moving towards smaller and fuel efficient cars from larger SUVs and trucks. Fuel efficiency is the most important factor in buying new cars. The company plans to invest roughly $14 billion in the U.S. on advanced technologies to improve fuel efficiency by over 25%.
- Ford is gearing up with new product launches in the U.S., with as many as eight new launches planned by 2015.
- Ford is planning to invest $16 billion in its U.S. operations, including $6.2 billion in U.S. plants, to design, engineer, and produce more new and upgraded vehicles and components by 2015.
- Ford's strategy is to increase the presence of electric vehicles in its lineup. This is likely to increase its market share, and benefit the company with the U.S. government demanding steep increases in fuel economy.
- 'One Ford' Vision to benefit Ford's car operations
- Ford has been developing a new business and advertising model labeled as 'One Ford' over the past few years. The CEO of Ford has downsized all regional brands and models, and also removed global segmentation. This has led to the development of models like the Ford Transit Connect, C-Max, Focus, and Fiesta.
The vision includes:
- Improved advertising, marketing, and communications programs to launch Ford cars globally in all markets.
- Restructuring the balance sheet by selling other brands and utilizing these proceeds for the Ford brand. Proceeds from the sales of Saab, Land Rover, and Jaguar brands have already been used in this manner.
- Better designs, fuel-efficiency, safety, all add value for customers with the latest launches under this vision.
- Successful product launches: Taurus, Fiesta, Fusion, F-150, and Focus are some of the successful well-known models of Ford.
Back to Company Overview
- GM's product overhaul could snatch some of Ford's market share
- GM is improving the quality of its engineering. For example, the Chevy Impala was previously only known as a successful fleet vehicle, but a redesigned version of the car became the first domestically manufactured car in over two decades to win Consumer Reports’ top ranking for a large sedan. This should make the car much more popular with retail buyers.
- The 2015 model version of the Chevrolet Cruze was named 2014′s car of the year by Automotive Fleet and Business Fleet Magazines. Sales of the Cruze are up by more than 40% on a year-to-date basis. GM has also been charging higher prices for this version, as the model offers better connectivity, through an Onstar 4g LTE and a standard built-in Wi-Fi hotspot.
- These strategies can result in improved sales and market share for GM, possibly even at the expense of Ford.
- Other economic factors
- Crude oil prices are beginning to pick up again after their rapid decline through late 2014 and early 2015. The prices are rising on expectations of less production, and as global demand picks up, commodity prices are likely to remain firm in the future. This will inhibit Ford's ability to offer greater incentives.
- The automotive industry is going to experience a combination of pricing pressure from raw material costs and changes in consumer buying habits.
- Higher fuel prices discourage sales of SUVs, and trucks that aren’t very fuel efficient, and indirectly impact Ford’s revenues. Considering that trucks constitute more than 60% of Ford’s sales in the U.S., this is likely to be a dampener.
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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