Ford Motors (NYSE:F) has had its shares of ups and downs. The stock bottomed at $9 back in July 2012 before recovering to about $14 in January 2013. The stock is currently trading near $12. Still, a lot of skepticism remains regarding Ford’s European operations as the region continues to post larger than expected losses. However, we believe there is significant upside potential for Ford since the North American operations are likely to remain solid while profits from China in the next few years could be significant enough to offset losses from Europe.
Here’s a summary of Ford’s operating profits in 2012:
North America: $8.3 billion
Europe: ($1.8 billion)
Asia Pacific:($0.08 billion)
South America: $0.2 billion
As you can see, North America alone is carrying the company.  In fact, its profits exceed the entire company’s profits. Although the company is gaining market share in Germany and Korea, North America will continue to remain solid partly because of a strong presence in the pickup truck segment. Trucks and SUVs have much higher margins than cars although the exact figures are not known. The “Detroit Three” still dominate this category with Ford’s F-150 being the best selling pickup truck for 36 years in the running. Moreover, the Dearborn-based automaker is introducing the refreshed model of its F-150 called the Atlas next year so that should really keep the profits riding high.
Ford’s North America margins were an impressive 10.7%, but the company expects long-term margins to stabilize to about 10%, largely because of a greater proportion of small cars being sold. Overall, the North American automotive market is nicely poised for growth in the next two years after which it may slow down as it reaches levels closer to its historical highs. A recovering housing market combined with the high average age of trucks (>10 years) bodes well for truck sales in the coming years as well.
Although Asia Pacific sales are gaining traction, the region does not contribute much to overall profits. This, however, is pretty common in the automotive industry where companies struggle to post profits during the initial years of investment. Take GM for example. It earned more than $1.6 billion last year in China which translates to about $550 per vehicle sold.  We are cautious in our estimates since Ford is relatively new to the Chinese market, and it will still take some time before its profits can match that of GM’s. In three years time, we assume that Ford could earn about $400 a vehicle.
Ford sold about 626,000 vehicles in 2012, up 21% over the previous year. What is worth mentioning is that sales accelerated last quarter – exceeding 40% in each of the three months. Furthermore, sales almost doubled to 62,000 units in January. The figure, on an annualized basis, translates to about 750,000 units. 
Therefore, it wouldn’t be surprising at all to see Ford sell more than a million units in 2015. Moreover, as Ford plans to introduce 15 new models in the country by 2015, sales should continue to rise. Thus, China alone could contribute more than $400 million to Ford’s coffers. If the figure were to rise to 1.5 million, you’re looking at $600 million of profits.
The European Question
Coming to Europe now. The automaker hopes to become profitable in the region by mid-decade. In our previous article, we argued that the road to recovery could be longer especially given how the recent data has come out. So, instead of Ford achieving break even, we assume that it will lose $500 million in 2015.
Ford lost $1.8 billion in Europe in 2012, almost $300 million more than what the automaker had projected after the third quarter, but this should be lower in the next 2-3 years because of:
a) Plant closures (two in the UK and one in Belgium) and lay-offs which will help Ford reduce overcapacity as well as fixed costs.
b) New model introductions which will help the automaker boost its top-line. One reason why Ford is losing money in Europe is because its revenues are no where sufficient to mitigate the fixed costs.
c) Russia, which is reported as part of Europe, is doing well with the automaker’s sales up 11% to 131,000 units in 2012. Investments are lined up by Ford and the country as a whole is doing well when it comes to automotive sales. Therefore, the sales decline in the remainder of Europe will be partially offset by increments in Russian sales.
Thus, a couple of years down the line, the Chinese profits should be large enough to offset European losses. Combine this with mushrooming North American profits and you have a company which will be at a much better situation than it currently is.
We have a $13 price estimate for Ford, which is slightly above the current market price.Notes: