Here Are Ford’s Key Value Drviers

Ford Motors‘ (NYSE:F) Q3 2015 results outperformed its prior-year showing on the back on strong sales and record profits across product segments in North America. We believe growth in this market will continue to be a key driver for Ford’s valuation in future, as the company expands its reach in the region through a strong product line-up that includes fuel efficient vehicles. While international markets constitute less than 13% of Ford’s valuation, in our estimation,  demand in these markets driven by the “One Ford” campaign should be another driver for Ford’s future growth.  The vehicle financing segment remains Ford’s most valuable segment as per our estimates, due to its high profitability, and it will continue be a key driver of value for the company.

Growth In The North American Market With Increased Focus On Fuel Efficient Vehicles

North America is the most critical market for Ford since roughly two-thirds of its revenues come from this region. Its F-150 series of pick-up truck is the highest selling vehicle in the U.S. and one of its most profitable vehicles. Between July and September 2015 sales of F-150 grew by nearly 9% on a year-over-year basis. Sales of the company’s SUV’s Edge and Explorer also grew by nearly 30% in this quarter. While we expect this trend to continue in future, Ford’s plans to produce more fuel efficient vehicles, given desires for a greener economy, will also drive its market share in future. Additional production of fuel efficient vehicles is planned by  utilizing existing North American manufacturing plants, thus servicing this demand with minimal investment.We expect the strong growth in the North American market to be a key driver for Ford’s valuation in future.

One Ford Vision To Focus on International Markets

The international vehicle market is 3.5 times bigger than the U.S. market and Ford has a 7% share in the global market, which we expect it to maintain over our forecast period. The company’s “One Ford” campaign seeks to save on production and design costs by producing a single fleet of vehicles for all markets globally. While the company is still trying to achieve an optimal sales channel mix for the European region, the impact of the China slowdown has hit its margins from this segment. Thus there is still a huge scope for the company to improve its performance in international markets, as the Chinese economy recovers and the company see results of its efforts in Europe.

As per our estimates, international markets account for around 13% of Ford’s valuation. The company has invested heavily in China and doubled its production capacity in the region over the past three years. It also plans to spend $1.8 billion in the next five years on research and development efforts in China. While we do not expect a significant increase in Ford’s international market share over our forecast period, we believe faster expansion in emerging markets can drive Ford’s growth in future.

Vehicle Financing Business

Ford’s vehicle financing business is inherently profitable and has become its most valuable business segment.  We estimate that more than 50% of the company’s valuation comes from this segment, given its rich EDITDA margin. Growth in this division is directly related to vehicle sales and this division will benefit directly from increasing revenues.  Further, given the high quality of its vehicles, the company does not need to offer unnecessarily high incentives to attract buyers.  This ensures that the company can charge competitive interest rates leading to a positive interest rate spread, thus making this division fairly profitable.  We expect that, as the vehicle sales increase, growth in the financing business will also be a key value driver for Ford.

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