Forget Europe, Ford Deserves A $16 Stock Price On US Sales

by Trefis Team
-9.62%
Downside
14.67
Market
13.26
Trefis
F
Ford
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Car sales for Ford Motors (NYSE:F) in the U.S. jumped 7% to 207,759 vehicles for the month of June as easing gas prices helped sports utility vehicles (SUVs) such as Escape, Explorer and Flex perform strongly. Sales of its small car Fusion surged more than 17% while Mustang sales increased by 16%. [1]

The North American business, which contributes more than 60% to the total revenues, remains strong for the automaker. Ford reported a pre-tax income of more than $2.1 billion,up 16% for its North American operations in the first quarter of 2012. The automaker seems to have the momentum on its side after vehicle sales surged 14% during May. Furthermore, its Canadian sales surged 27% to 32,338 vehicles in May. [2] Another thing that seems to favor Ford for its North American operations is its greater focus on fuel efficient vehicles. By year-end, Ford will have eight cars in its portfolio with a mileage in excess of 40 mpg. [3] This corroborates well with our belief that the company deserves a higher valuation than the current market price suggests.

See our complete analysis for Ford’s stock

International Operations Offer Hope but Europe a Worry

Ford is going full throttle with investments in Asia/Pacific. Currently, eight plants are being built in the region to expand capacity with the most recent being the decision to invest $760 million in a manufacturing plant in Eastern China to feed the growing appetite of a nation whose auto market Ford expects to surge to 30 million vehicles by 2020 from 18.5 million in 2011. To appeal to Chinese consumers, Ford also plans to launch 15 new car models by 2015. [4] In China and Asia/Pacific in general, higher costs to support the growth initiatives are affecting the short-term profitability. For example, the automaker plans to double the workforce as well as the number of dealerships in China by 2015. Although Ford posted a small loss for Asia/Pacific in the first quarter, it still expects the region to be profitable for the full year.

Ford has under-performed the market indices with declines of more than 10% for 2012 itself exacerbated by the recent announcement that European losses will top $500 million for the second quarter alone. European losses stood at $149 million for the first quarter. Europe will be a challenge for Ford as most of its plants are running at excess capacity. Furthermore, unions and governments are making it difficult for Ford (and other auto majors) to shut the plants. If Ford can mend its European losses, then we actually have a solid profit making company whose biggest segment continues to grow at a healthy rate.

We have a price estimate of $16, which is more than 50% above the current market price

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Notes:
  1. Ford June Sales Jump 7%, SUVs Flying Off The Lot, July 3, 2012, rttnews.com []
  2. Ford Canada claims top spot for May vehicle sales, June 1, 2012, reuters.com []
  3. New Fords getting big boost, July 3, 2012, vancouversun.com []
  4. Ford invests $760 million for new China plant, more capacity, April 19, 2012, reuters.com []
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