Ford’s North America Margins And European Turnaround Are Keys To Earnings

by Trefis Team
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Ford Motors (NYSE:F) is scheduled to announce its Q4 earnings on January 29. The stock has gained more than 25% since its last earnings were announced on the strength of the U.S. auto market. In addition to watching for both sales guidance and margin trends in the N. America business, investors will be eyeing the performance in Europe to see if there are any signs of improvement. Ford expects European losses to top $1.5 billion for 2012 and doesn’t expect the region to become profitable before 2015.

As we have mentioned in previous articles, the European auto industry is plagued with overcapacity issues, but the labor unions and the governments have made it enormously difficult for the auto companies to reduce capacity in order to protect jobs. Therefore, automakers including Ford, General Motors (NYSE:GM) and Peugeot Citroen, are not even able to recover their operating expenses and are piling on losses.

Ford’s recovery plan in Europe includes shutting down three plants as well as launching a total of 15 new or refreshed models in Europe over the next five years, including newer versions of Mondeo, Fiesta and Kuga and the iconic Mustang. [1]

See our complete analysis for Ford Motors here

North American Margins To Deteriorate ?

North America, which accounts for 60% of Ford’s revenues, remained steady in 2012. What will be particularly interesting to find out is if the automaker can maintain its margins in the region. They stood at a solid 12% in the third quarter, but Ford expects the margins to drop to 8-10% in the long run due a greater proportion of small cars (such as the Fusion and the Focus) being sold. [2]

This year the automaker hopes to revive its Lincoln brand by introducing four new models in the next four years, including a new MKZ sedan. It has also increased its marketing spend with the company buying an ad spot in Super Bowl. Usually the luxury vehicles and trucks have better margins than small cars so Lincoln’s resurgence could partially offset any decline in the long term margins caused by sales of smaller vehicles.

Ford also showcased its 2015 concept F-150 called the Atlas at the Detroit Auto Show. The F-Series alone accounts for 30% of Ford’s American sales and has been the best selling pickup truck for 36 consecutive years now.

China Sales Gaining Momentum

China, where the automaker’s presence lags other major automakers like GM, is starting to gain importance. Chinese sales surged 21% in 2012 and now account for more than 10% of the total sales. Particularly, the previous quarter was very strong with each month posting more than 30% gains helped by the Focus and also by the fact that Japanese cars fell out of favor in China. Ford is developing a low cost model in its Hangzhou plant in Eastern China, which is due to begin production from 2015 onward. In total, Ford plans to launch 15 new car models by 2015. [3]

However, an operating margin of 1.7% in Asia/Pacific in the the third quarter is something on which the automaker will need to improve longer term for this region to contribute meaningfully to earnings.

We have a $13 price estimate for Ford, which is about 10% lower than the current market price.

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Notes:
  1. Ford unveils 15 fresh models for European market, September 11, 2012, mercurynews.com []
  2. Ford Sees Margins Shrinking as Buyers Shift to Small Cars, November 19, 2012, bloomberg.com []
  3. Ford invests $760 million for new China plant, more capacity, April 19, 2012, reuters.com []
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