Ford’s European Product Offensive To Steer The Automaker Out Of Red

With European auto sales rising for the third time in four months, there is a real conviction that the automotive market in the region has bottomed out. Overall, retail sales in Europe grew 4.6% to 1.04 million units in October. ^[1] Sales for Ford Motors (NYSE:F), one of the better performing automakers in Europe, gained 1.7% to 90,300 units. ^[2]

We have a $18.66 price estimate for Ford, which is about 10% more than the current market price.

The year started off poorly for Ford in Europe but a spate of model refreshments and new introductions have helped the automaker outperform the broader market in the last few months. The automaker lost share in October primarily because of its performance in Spain, where it is trying to cut down its presence. Auto sales in Spain were artificially boosted (up 34%) due to the ongoing government incentive program. Excluding Spain, Ford’s market share increased.

Ford Upping Its Game

Ford had earlier aimed to introduce a total of 15 new or refreshed models in Europe over the next five years but now plans to raise that figure to 25, starting with the debut of the affordable SUV EcoSport early next year. In addition, the European built Mustang will also be introduced next year. Ford is also adding a premium car Vignale to its product portfolio, which the company believes should improve its image. It is highly critical that the brand Ford resonates positively with Europeans. A strong brand will help Ford accelerate sales whenever the market starts consolidating again.

During the third quarter, Ford’s unit sales grew 5% in Europe. ^[3] This was during the period when the overall market was still declining. Now with the market showing signs of rebounding, the entire automotive industry, including Ford, is bound to benefit.

Cutting Capacity

The auto industry has long been plagued with overcapacity issues in Europe, but the labor unions and governments have made it incredibly difficult for the automakers to shut plants in the face of declining employment levels. Ford lost $1.8 billion in 2012  and is expected to lose another $2 billion in 2013 at the start of the year. ^[4] However, the three quarter results suggest that the automaker might contain the losses well within that figure. For the first nine months of the year, the automaker has lost $1.0 billion. Ford aims to become profitable in Europe by 2015 with a long term operating margin target of 6% to 8%.

Ford has already closed two British plants and is in the process of shutting another one in Belgium. The plant closures will help the automaker shrink its capacity by 18% (or about 355,000 units) in the region as well as reduce its workforce by 13%. The one-time costs could dent Ford’s profits by as much as $400 million in 2013 but should result in annual savings of $450-500 million going forward. ^[5]

Although the market has grown for three times in the last four months, there can be no guarantee that this trend will continue in the future. But the general belief is that the market has reached such a low level that a natural process of replacement will ensure that this level is at least sustained.

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1. European Car Sales Rise a Second Straight Month on Spain, November 19, 2013, bloomberg.com [↩]
2. Ford Investor Relations [↩]
3. Ford Motors 10-Q [↩]
4. Ford Motors 10-k [↩]
5. Ford’s profit goal for Europe in reach, November 22, 2013, europe.autonews.com [↩]