What Ford Stands To Lose From A U.S. Auto Market Slowdown

+15.77%
Upside
12.18
Market
14.10
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F: Ford Motor logo
F
Ford Motor

North America is the most profitable geography for Ford Motor Company (NYSE: F). The company derives nearly 60% of its annual revenue from the continent and close to half of its annual new vehicle sales. The U.S. in turn is the biggest auto market in North America contributing close to 85% of the new vehicle sales for the region each year. However, in recent months, fears have begun to rise that the auto market might have reached peak profitability for this cycle. The auto market can broadly be divided into two categories: these are passenger cars and trucks and crossovers. Sales in the former category have been declining and the trend continued in the first half of 2016 as well. On a year-to-date basis, car sales have declined by 7.7% compared to the prior year.

In the past couple of years, a booming SUV and crossover market has delivered record profitability to Ford as consumers have splurged on heavier vehicles as a result of low gas prices. But oil prices have started to rise again and this could put a halt to the boom in this market. Moreover, there are two broad trends that hint at a slowdown in new car sales in the U.S. car markets:

  1. A large proportion of new vehicle sales in recent years were driven by cheaper leasing rates. As these leases expire, there is likely to be a glut of used cars in the market, which will be much cheaper than new or refreshed models which are generally higher priced and thus affect their sales.
  2. The number of new driving licenses given out to drivers, as well as the average miles driven per driver, have been declining in the U.S. in recent years. This is the combined impact of better public transportation and the influx of ride sharing services like Uber and Lyft in the U.S. transportation market.

As a result, it is worth considering how different new vehicle sale scenarios can affect Ford’s valuation going forward. The table below models three such scenarios and shows that Ford could lose upto 8% of its market cap as a result of a decline in new vehicle sales in the U.S.

f scenarios

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Ford Motor

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