Ford Earnings Preview: North America, China Strength To Continue To Boost Profitability

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Ford Motor

Ford Motors (NYSE:F) is scheduled to announce its Q1 FY14 earnings on April 25. Shares of the automaker have been trading down ever since the company announced that it expects its margins to face a downward pressure in 2014. For 2014, the automaker anticipates the full year profits to be in the region of $7 billion to $8 billion. [1] In 2014, the automaker will roll out 23 new models globally, including the revamped version of its best selling F-150 pickup.

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

North America To Deliver Most Of The Profits

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Not only is North America the biggest market in terms of sales, it is also the most profitable. Ford’s operating margins in the region stood at 9.9% through 2013. Margins in the first quarter are expected to decline to the range of 8-9%, due to the impact of costs related to the launch of 15 new or refreshed models in the region. [2]

Ford’s sales were down 6% year-on-year in February in the U.S. and retail sales were down 4%. However, the Ford F-Series and Lincoln posted strong gains of 37% and 36% respectively.  Sales and deliveries are likely to have suffered due to the extreme weather conditions over the winter period. We expect this trend to reverse over the next few quarters. [3]

European Operations Could Improve Further

In Europe, the company expects reduced losses as the European transformation plan remains on track to achieve profitability by 2015. Further improvement in Ford’s operational performance could be aided by a recovering auto industry, which has been in the green for five times in the last six months. Furthermore, unit sales in Europe rose by 7% in the first quarter of 2014. [4]

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. 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 this year. [5]

In addition, the European built Mustang will be introduced this year as well. The automaker is also adding a premium car Vignale to its product portfolio, which the company believes should improve its image. It is highly critical that brand Ford resonates positively with Europeans. A strong brand will help Ford accelerate sales whenever the market starts consolidating again.

Chinese Sales Keep On Surging

Ford has had a brilliant year in China. In fact, Ford’s sales in the country were so strong in 2013 that the automaker overtook Honda and Toyota as the fifth largest shareholder of auto sales by foreign companies in the region. Ford’s sales have shown continued strength in 2014 as well as the company recorded a 45% expansion in the first quarter of 2014. The company is set to overtake Nissan and Hyundai in the region. [6]. Vehicle sales were boosted by the introduction of seven new or refreshed models including the EcoSport, the Kuga, the Fiesta and the Mondeo, which appeal to the value seeking Chinese customers. With close to a million unit sales, China has now become one of the biggest markets for Ford.

It is also important to note that sales growth in 2013 was unusually higher due to the introduction of a number of new, mass-appealing vehicles. We expect this trend to continue as the company has announced that it plans to add 15 new models to its fleet in China. [7]  With a number of higher end models still to be introduced (such as the Lincoln brand), the next set of vehicle introductions should have a greater contribution towards the profits, if not towards the unit sales growth.

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Notes:
  1. Ford Cautions About Earnings Growth, December 18, 2013, wsj.com []
  2. Ford Hiring 5000, Launching 16 New Models In North America , USA Today, December 2013 []
  3. Ford Sales Release, Ford, March 2014 []
  4. Europe Car Sales Boom, Forbes, April 2014 []
  5. Ford’s profit goal for Europe in reach, Odell says, November 22, 2013, europe.autonews.com []
  6. Ford Close To Passing Nissan, Hyundai In China After Sales Surge, Bloomberg, April 2014 []
  7. Ford Mustang Gallops Into China, IOL Motoring, April 2014 []