Ford Cruises To $13 Fair Value With New Strategy

F: Ford Motor logo
Ford Motor

Ford Motors (NYSE:F) has seen its share of ups and downs. Its U.S. sales have generally been solid but concerns about Europe overshadow everything else. Moreover, since it has a very limited Asian presence currently, the automaker is not able to benefit from the faster growing economies. The stock went as high as $13 in the first quarter of the year before retreating to around $10 currently.

We have a $13 price estimate for Ford, which is about 30% higher than the current market price. How do you justify an upside for a company which is expected to post $1 billion losses in Europe and possesses a limited presence in Asia? Below we look at some of the factors to consider.

See full analysis for Ford Motors

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1) Solid North American Operations

Since 60% of Ford’s top-line is generated from North America, getting it right in this region is of paramount importance. And Ford is certainly not disappointing with sales up 6% in the U.S. through August. [1] And although the automaker has lost some market share this year, that was not unexpected since the Japanese automakers were expected to rebound strongly on higher production after they were hurt badly last year due to the tragic tsunami which impacted their production and supply chain.

Offering a wider range of fuel efficient cars has been one of the focus areas of the company. By the end of 2012, Ford will have 8 models with more than 40 mpg as higher R&D expenses have allowed Ford to invest in making better quality cars than it a few years ago. With the 2013 versions of Fusion and Escape, Ford might be able to snatch back some of its lost market share in the last quarter.

Ford’s highest selling vehicles, however, continue to be its F-series line of pickups. Sales of its F-series trucks are up almost 13% in the first eight months of the year. Ford has already introduced the 2013 versions of the F-series pickups and even added a new vehicle called F-150 Limited, costing more than $50,000 to expand its portfolio of luxury pickups. A greater proportion of luxury pickups would certainly help improve margins as well. Currently, 30% of Ford’s pickup sales are for luxury trucks which usually cost more than $35,000. [2]

2) Fixing Europe Business

The European operations posted a loss of $403 million for Ford in the second quarter, and the company expects losses for the full year to top $1 billion. Ford is using less than 65% of its installed capacity whereas auto companies generally need to utilize more than 75% of their installed capacity to be profitable. [3] Clearly, Europe is a big concern for Ford. Overall the auto industry remains very weak in the region with sales down 6% in the first half of the year. Ford has performed even worse than the overall market with sales dropping 10% in the similar time period.

To boost its flagging sales, Ford is gearing up to launch a total of 15 new or refreshed models in Europe over the next five years. The company plans to roll out newer versions of Mondeo, Fiesta and Kuga and the iconic Mustang. And thanks to its ‘One Ford’ strategy, the auto company won’t be designing cars specifically for Europe. As part of its ‘One Ford’ strategy, the automaker plans to engineer cars that can be sold throughout the world. This is again something which might help the company optimize its R&D expenses as well as command a greater negotiating power for its parts due to larger economies of scale involved. The recently launched Ford Fusion in the U.S., for example, is the same as Ford Mondeo in Europe. That wasn’t the case earlier.

Furthermore, the automaker is readying to lay off hundreds of workers in its European plants as the automaker seeks to contain its losses from the region. The job cuts will be voluntary and primarily aimed at salaried employees. Although this might be detrimental to its income statement in the near term due to one time expenses associated with the severance packages, this is a step in the right direction since the European auto market is expected to remain bleak for the foreseeable future. Thus, lowering the long-term operating expenses is essential to maintaining a profitable business in the region.

3) Beefing up Presence in Asia and China

Ford has traditionally lagged other major auto majors such as GM, Volkswagen and Toyota in China primarily because it was too slow to enter the Chinese market. But that is about to change as the automaker is going full throttle with investments in China and Asia/Pacific. Currently, eight plants are being built in the region to expand capacity with the latest decision to pour in $760 million in a manufacturing plant in Hangzhou to cash in on the growing opportunity in a nation whose auto market Ford expects to surge to 30 million vehicles by 2020 from 18.5 million in 2011.

Ford is also developing a low cost model in its Hangzhou plant in Eastern China which is due to begin production from 2015 onward. The automaker has only 6 models in the country currently (compared to GM’s 30) but is adding a seventh model, the Kuga compact SUV by the end of the year. In total, Ford plans to launch 15 new car models by 2015. Ford is also gearing up to launch its luxury brand Lincoln in the country from 2014 onward.

Even in South Korea, Ford has less than 1% of the auto market, but sales for the first seven months of the year are up 28%. The share of imported cars is rising after the country signed free-trade agreements (FTA) with the E.U. and the U.S. South Korea’s FTA with the U.S. came into effect in March 2012.

In August, Ford’s CEO Allan Mulally announced the company will launch 6 new models in South Korea this year. The models will include new versions of Escape SUV, Fusion, Mustang, Taurus and the diesel variant of Focus. Besides the new introductions, the automaker will spend $45 million in 2012 to expand dealership networks and set up 15 new shops and service centers in the country. Thus, South Korea could be another bright spot for the automaker in the time to come.

Understand How a Company’s Products Impact its Stock Price at Trefis

  1. U.S. auto sales, []
  2. 2013 Ford F-150 Limited unveiled as range-topping luxury truck, June 26, 2012, []
  3. Ford Shares Fall on Profit Warning, June 29, 2012, []