In light of recent data suggesting weaker consumer confidence and a flagging economy, we are growing more cautious on Ford (NYSE:F) and auto makers in the near term. The macro headwinds that hammered global markets this week still linger and could negatively affect consumer and business sentiment including vehicle sales growth. We are bullish on Ford’s fundamentals as the company managed to grow its vehicle sales in Q2 due to its fuel-efficient line up and investments in new technologies; however in the event of a downturn, the auto market will slow meaningfully and Ford’s business will certainly take some lumps. Ford mainly competes with auto manufacturers like GM (NYSE:GM), Daimler (ETR:DAI), Audi (NSU:GR), Honda (NYSE:HMC), and Toyota (NYSE:TM).
Our $14 price estimate for Ford stock is about 30% above current market price and is based on the company’s intrinsic value.
Sales Will Take a Hit if Global Growth Stalls
Ford indicated that it expects to achieve significant global sales growth from a refreshed product portfolio and stronger margins by focusing upon its ‘One Ford’ plan. [1]
Under this plan, Ford aims to restructure to achieve better operating profitability and improve its balance sheet. It also aims to accelerate the development and production of new cars with a focus on better designs, fuel-efficiency, safety and value for customers with the latest launches. We wrote on this in our previous post titled, Ford’s Market Share Benefitting from “One Ford” Plan.
But Ford’s growth plans remain reliant on continued global growth. Currently, global growth is threatened by several macro headwinds such as Euro-zone debt crisis and concerns over U.S. growth both of which can impact the major western markets as well as decelerate growth in export-reliant Asian economies. Longer term if easy money policies in the west and elsewhere remain in place for an extended period as indicated by the Federal Reserve, this could have the side effect of fueling inflation later on. This ultimately can feed through to higher inflation in markets like China and India as well as commodities and undermine Ford’s growth plans.
Need to Watch Materials Costs
Automotive margins have been under pressure due to increasing commodity prices as higher material and product-related costs have risen sharply during the recovery in the past few months. In the medium-term, the global economic slowdown will likely reduce commodity prices due to reduced industrial demand and thus increase Ford’s gross margins. However in the longer-term, we expect commodity prices to increase on the back of demand from emerging economies in addition to inflationary knock on effects that economic stimulus can provide that could feed through to gross margin pressures.
Moreover, a few near-term macro concerns such as increasing mix of small cars, rising commodity costs, higher structural costs, and potential competition from new entrants remain and could depress Ford’s earnings as well.
While many of these factors are forgiven by growth in auto sales during good times and this largely underlies the assumptions in our valuation, if sales slow due to a stumbling economy and dour consumer sentiment, Ford could be in for a rocky ride.
You can drag the trend lines in the modifiable charts above to see the impact of these trends on Ford’s stock value.
See our complete analysis for Ford.
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