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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: The U.S. automotive market showed strong signs of resilience in 2011 and registered a 10% growth in vehicle sales to reach approximately 13 million. In 2012, the momentum continued as 14.5 million vehicles were sold during the year. The U.S. automotive industry is expected to continue its show of strong growth in 2013 as well although the rate of growth will slow down. The U.S. automotive industry seems decoupled to a large extent from the sluggish European growth. Auto sales for January 2012 were seen at 1.03 million units, which translates into a seasonally adjusted annualized rate (SAAR) of 14 million vehicles. 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. According to an SEC filing, Ford registered a 25% increase in small cars sales in 2011, gaining a 10% share of the small car segment and more than a full percentage point increase compared to 2010. This is the best share in the U.S. small car segment for Ford since 2003.
If the number of trucks sold in North America increases to 12.5 million by 2019 instead of the 10.5 million that we currently forecast, there would be a 5% upside to Ford's stock price.
Ford Cars & Trucks International
Ford International Market Share: Europe has been going through the toughest times since the adoption of a single currency in 1999 and the crisis that started in Greece has spread through other peripheral countries as well. The economy is still in distress and the governments across the Europe are adopting austerity measures to ride through the situation which is not going to help the industry either. Although, the severity of the economic distress will be different for different countries, the overall trend in sales as well as production, is expected to be a declining one. Vehicle sales were down 9% in 2012 and the trend is expected to continue.
If Ford is able to increase its international market share to 5.4% by 2019 from the 4.6% that we currently forecast, there could an upside of about 10% to Ford's stock.
Going forward, a worsening situation in Europe could prove to be a major dampener for the company.
Ford Motor Company is a global automotive company headquartered in 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 164,000 employees and about 90 plants worldwide, the company’s automotive brands include Ford, Lincoln and Mercury. The company provides financial services like 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 the 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 5x larger than the North America vehicle market:
2012 vehicle sales in North America are estimated at 14 million. In comparison, we estimate that there will be approximately 5x as many vehicle sales (around 70 million) internationally. We estimate that Ford will be able to maintain its global market share to approximately 8% and continue to grow in North America (Ford trucks and cars and Lincoln combined) in 2012 with a market share of around 16.5%.
North America share in trucks higher than the share in cars
In 2011, Ford had about a 17% share in the North American vehicle market. More than 10% 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, the overall share in North America of vehicles might decline for Ford.
Vehicle financing business driven by high margins
Ford leases around 1 million vehicles annually from which it earns about $2.5 billion per year in revenue (about $200 million per month) and has profit margins of approximately 87%. Profit margins of Ford's automotive business were around 20% in 2011.
The company also has $72 billion of vehicle loans outstanding from which it earns an average interest spread of 3.7%, or $1.2 billion in annual profits.
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 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 ate up much of the value.
The decision 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 kill off the 71-year 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 US 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 has been 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 American, claiming that higher income US 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 US in 2009.
We believe this will lead to:
- Better advertising, marketing and communications program 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 plans and its line-up of vehicles available in the US. 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 highly demanded fuel efficient cars to the US 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 automotive division in North America and international markets.
Restructuring, consolidation and other trends:
- Strengthening the US 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 of Japanese automakers which were hit hard by the tragic 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 the medium-long term, we see Ford's car market share in the North American region close to 11.0%.
Trefis considers the following factors for its forecast:
- Move towards fuel efficiency
- Ford is moving towards smaller and fuel efficient cars from the larger SUVs and trucks in emerging markets.
- 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 represent electric vehicles as a major portion of its next decade line-up.
- This is likely to increase its market share with the US 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.
- Standardization will help reduce costs and maximize best practices.
- Restructuring the balance sheet by selling other brands and utilizing these proceeds for the Ford brand. Saab, Land Rover and Jaguar brands have already used such a program earlier.
- Better designs, fuel-efficiency, safety and value add for customers with the latest launches under this vision.
- Better brand visibility versus competitors
- The recall of more than eight million vehicles worldwide by Toyota would reinforce the supreme brand image of U.S. and German automakers in the minds of consumers. This would benefit the company.
- In October 2011, Moody's upgraded Ford to from "Ba2" to "Ba1", just one notch below the investment grade and also assigned a positive outlook, which means further ratings increases might be on the cards.
- Successful product launches: Taurus, Fiesta, Fusion, F-150 and Focus are some of the successful well-known models of Ford.
- Smaller fuel efficient cars & new product launches by Ford to increase car sales
- Ford is moving towards smaller and fuel efficient cars from the 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 advance technologies to improve fuel efficiency by over 25%.
- Ford falls below Toyota’s 48-50 mpg range, however compares well overall on fuel efficiency.
- Ford rolled out new powerful engines for the 2011 F150, but as much as the company focused on improving power, the company put just as much effort into these new engines for being more fuel efficient.
- Ford is gearing up with new product launches in the U.S. with as many as 8 new launches planned by 2015.
- Competitors struggles will help benefit Ford
- Ford's greatest market share opportunity is from GM which is in the process of phasing out a large number of its dealerships, leaving sales up for grabs.
- Ford has better financial strength than its competitors GM and Chrysler and was the lone automaker not to be bailed out by the US government in 2009.
- Aggressive pricing & incentives by Ford to drive car sales
- Ford has launched several incentive campaigns, including cash rebates and zero-percent financing to try to win over customers from other competitors like Toyota.
Back to Company Overview
- Weak macroeconomic business environment
- Global economic conditions are improving but remain fragile. Recoveries in some markets are modest due to weak labor markets and tight credit. Overall, we expect macroeconomic factors to improve in the course of the coming years.
- Weakness in the European economy could impact sales
- Though the management expects sales to remain stable in the major European economy, it is no hidden fact that the targeted sales numbers would be very difficult to pull out.
- Moody's also acknowledged this fact and expressed its view that the deteriorating economic conditions in Europe was a major hurdle for the company to win back the investment-grade status for its debt.
- Other economic factors
- Crude oil prices has more than doubled since January 2009 to more than $100 per barrel. As global demand picks up, commodity prices are likely to remain firm in the future.
- 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 US, 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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