As Ford (NYSE:F) is scheduled to announce its Q3 financial results next week, many investors and analysts will pay special attention to the company’s costs. Over the last quarter, Ford and Toyota (NYSE:TM) announced their collaboration to developing new hybrid system for Light Trucks and SUVs, which will help lower the carmaker’s R&D costs over the medium-term. [1] Also, while Ford’s sales in U.S. continued to grow over the quarter in spite of persistently high unemployment rates in U.S. and economic slowdown, its sales in China slowed down substantially as China implement monetary tightening to control the high inflation rates. Ford competes in U.S. and China, its two biggest markets, with other major automakers such as GM (NYSE:GM), Daimler AG (NYSE:DAI), Honda (NYSE:HMC), Toyota, Hyundai (SEO:005380) and Nissan (PINK:NSANY).
See our complete analysis for Ford stock here.
R&D Collaboration to Help Win Market Share Longer Term
U.S. fuel-efficiency standards will soon become more stringent with the eventual aim to achieve fuel economy of 54.5 miles per gallon for cars and light-duty trucks by model year 2025. [2] In the near-term, fuel efficiency requirements will be raised to 35.5 mpg for model years 2012-2016 vehicles. With such stringent requirement and with the threat of economic slowdown looming large, we believe that Ford will be able to rationalize its costs again through collaboration with Toyota to reduce its R&D expenditure without losing its competitive edge in technology.
Through their R&D collaboration, Ford and Toyota aim to co-develop hybrid systems which will provide greater fuel efficiency without compromising on performance. They also aim to jointly develop in-car telematics and Internet based services, which will improve the driving experience and will further help drive sales. Over the medium to long term, we expect that this collaboration will also help these companies introduce new products with advanced technologies faster than if they continued to work separately, thus helping improve their market share.
Ford’s China Growth Plans Bumpy as Inflation Slows Auto Market Growth
The growth of the Chinese auto industry has been falling in recent month compared to last year when Beijing boosted demand with tax cuts and subsidies. It has also been beset by rising inflation in China, which is forcing the government to continue its monetary tightening policy which is impacting the auto-sales growth.
In China, Ford sales suffered year-over-year (yoy) declines in August and July. [3] In September, Ford was able to reverse its fortunes and reported a modest sales increase of 6 percentage points (ppt) year-over-year (yoy) in Ford-branded passenger cars, led by Ford Mondeo. [4]
We believe that Chinese auto-market growth will remain bumpy until the government renews its stimulus program in light of worrying global economic environment after reigning in inflation. This will adversely affect Ford’s overall growth rate in international markets over the medium-term.
Ford’s New Labor Contract with UAW Can Protect Competitiveness Going Forward
Ford has recently ratified a new agreement with its largest employee union, UAW, which helps Ford control its labor costs in an increasingly uncertain economic environment. In addition to the cost advantages that this agreement will offer, we believe that it will protect Ford’s profitability by lowering its break-even point, so that any lowering of Ford’s sales in U.S. will not harm the company.
You can drag the trend lines in the modifiable charts above to see the impact of these trends on Ford’s stock value.
Our price estimate of $14 for Ford’s stock‘ is more than 25% above the current market price.
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