Are Warning Bells Ringing Again For Ford?

by Trefis Team
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Ford Motors‘ (NYSE:F) stock has gained more than 30% in the last six months. Its North American operations have been steady and margins solid. Investors are confident that the automaker will steer itself out of the European mess. However, just when it seemed that the picture was beginning to improve for the Blue Oval, new issues have popped up which could again put the company in a precarious position. Here are some of the things to be cautious about:

1) Europe Eludes

While its European operations have been posting massive losses for sometime now, the problem is that there haven’t been any signs that suggest a turnaround is in progress. Ford’s revival plans are based on the assumption that it will maintain its market share in Europe with the help of new model introductions.

However, it has been a disastrous start to the year with sales plummeting 23.4% through February. Total automotive sales on the other hand are down 12%. Ford continues to lose its appeal for European customers even though the average retail incentives jumped 30% to 2,750 euros in 2012. That is 500 euros above the market average. [1]

The automaker expects to lose $2 billion in Europe this year, but the figure could very well bloat in case there is no improvement in the performance.

See our complete analysis for Ford Motors here

2) Yen Devaluation

Since Japan’s Prime Minister Shinzo Abe took office in December, the yen has fallen more than 20% against the greenback. Moreover, the PM is determined to weaken the currency even further. American automakers aren’t pleased with Abe’s policies, or Abenomics as they are popularly referred to.

A weak yen could spell trouble for Detroit as it could lead to predatory pricing by the Japanese automakers. For cars that are imported from Japan, the overall costs decline (in terms of dollar) whenever the yen depreciates against the dollar. Even for vehicles that Japanese autos assemble in North America, there are certain parts that are imported from Japan.

A weak yen could inflate profits of Japanese firms and at the same time make cars offered by American auto companies appear expensive. Ford CEO Alan Mulally publicly admitted that he’s concerned about the possible effects that a falling yen will have on the American automotive industry. [2]

A 1% deterioration in Ford’s gross margins could drag the valuation down by 10%. Read more on the yen’s devaluation here.

3) South American Losses

While Ford’s North America, European and Chinese operations generally make the headlines, either for the right or the wrong reasons, investors often overlook South America. The bad news is that Ford now expects the first quarter operating loss in the region to touch $300 million.

The Dearborn-based automaker insists that currency fluctuations and volatile government policies are the reasons for the sudden jump in anticipated losses. Venezuela’s currency, Bolivar, has devalued more than 30% last month alone. To make matters worse, Brazil and Argentina have limited their imports of Ford’s Mexican built Fiesta and Fusion. [3]

Ford’s South American operating profits stood at $213 million in 2012, but for 2013 the company is cautious about the guidance as currency fluctuations had already started affecting its operations by the time it announced its Q4 2012 results. The automaker expects to breakeven in the region this year, but now that it anticipates a loss of $300 million in the first quarter alone, that could also be in jeopardy.

We have a $13 price estimate for Ford, which is in line with the current market price.

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Notes:
  1. Ford’s European sales slide threatens revival plan, March 21, 2013, bloomberg.com []
  2. Ford CEO Says He’s Concerned About Effect of Weakening Yen, March 25, 2013, bloomberg.com []
  3. Ford Forecasts $300 Million South America Loss in First Quarter, March 28, 2013, bloomberg.com []
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