While Ford‘s (NYSE:F) line-up of fuel-efficient vehicles helped the company report year-on-year (y-o-y) vehicle sales growth in the last quarter, its quarter-on-quarter (q-o-q) sales growth declined around 8 percentage points (ppt).   In the medium-term Ford’s sales will remain challenged by an overall economic slowdown in the U.S., which is battling a slow recovery and uncertainty around the European sovereign debt crisis.
Even though Ford’s margins this year will remain under pressure due to high structural and commodity costs, we believe that Ford’s margins will recover due to a better sales mix of vehicles and easing commodity prices, which have declined significantly near the end of September. Ford competes globally with other major automakers such as GM(NYSE:GM), Honda (NYSE:HMC), Daimler AG (NYSE:DAI), Honda (NYSE:HMC), Toyota (NYSE:TM), Hyundai (SEO:005380) and Nissan (PINK:NSANY).
Our price estimate of $14 for Ford’s stock is around 25% above the current market price.
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Ford U.S. sales deceleration can continue
In the third quarter, retail sales of Ford’s vehicles in U.S. declined by around 8 percent q-o-q, largely because its car sales declined by nearly 7% during the same period.  This deceleration in sales is especially worrying given that recently the Federal Reserve has also lowered its forecast of U.S. economic growth over next two years significantly.  U.S. economic growth slowdown will adversely effect the automotive industry over the medium-term because of faltering customer confidence.
Ford focusing upon fuel-efficiency technology to gain market share
Ford managed to continue increasing its market share last quarter, helped largely by its impressive line-up of fuel-efficient vehicles. Recently Ford partnered with Toyota to co-develop hybrid systems which will provide greater fuel efficiency without compromising on performance. The companies also aim to jointly develop in-car telematics and Internet based services, which will improving the driving experience and will further help drive sales. 
We believe that this collaboration will help both Ford and Toyota introduce new products with advanced technologies faster than if they continued to work separately, thus helping improve their market share in the mid to long-term.
Ford’s margins under pressure this year but will improve in the medium-term
In its latest quarterly report, Ford expects its margins to be lower in 2011 than last year because of higher structural costs (expected to be about $1.6 billion higher than 2010) and higher commodity costs (expected to be about $2.2 billion higher than 2010). But we believe that Ford’s margins will improve over the medium-term due to benefits from its latest deal with UAW, a better sales mix and lower commodity prices.
Ford trucks sales have recently increased at a faster pace than Ford car sales, and as trucks carry better margins, this will support margin improvement going forward. Also Ford recently concluded a deal with UAW that will help the company control its fixed costs going forward. The ratings upgrades as a result of this deal will also reduce Ford’s debt servicing costs. (See our previous post: Ford’s Stock Could See a Leg Up with UAW Ratification & Ratings Upgrade)
You can drag the trend lines in the modifiable charts above to see the impact of these trends on Ford’s stock value.Notes: