Ford’s North American And Chinese Operations To Buoy Profits; Europe Could Improve

Ford Motors (NYSE:F) is scheduled to announce its Q4 and full year earnings on January 28. Shares of the automaker have been trading down ever since the company announced that it expects its margins to face a downward pressure in 2014. Ford’s full year profits before tax are estimated to touch $8.5 billion in 2013. Overall, it has been a very strong year for Ford with robust sales in the U.S., a gradual improvement in Europe and burgeoning sales in China. However, for 2014, the automaker anticipates the corresponding figure to be in the region of $7 billion to $8 billion. ^[1] In 2014, the automaker will roll out 23 new models globally, including the revamped version of its best selling F-150 pickup.

We have a $18.66 price estimate for Ford, which is about 15% more than the current market price.

North America To Deliver Most Of The Profits

Not only is North America the biggest market in terms of sales, it is also the most profitable. Ford’s operating margins in the region stood at 11.2% through the three quarters of 2013. On the other hand, margins in the fourth quarter could decline due to year-end discounts in order to meet the targets.

Ford is also showcasing the new 2015 F-150 at the ongoing Detroit Auto show. The F-Series has been the best selling vehicle for 37 consecutive years in the U.S., with sales up 18.3% in 2013. Since pickup trucks usually have higher margins than mainstream cars, they are pivotal to the automaker’s profitability. Therefore, it doesn’t come as a surprise that the automaker is taking its model refreshment very seriously. Overall, Ford’s sales were up 10.7% in the U.S. in 2013. ^[2]

European Operations Could Improve Further

During the third quarter of 2013, Ford’s European losses narrowed to $228 million from $468 million in the third quarter of 2012. Further improvement in Ford’s operational performance could be aided by a recovering auto industry, which has been in the green for five times in the last six months. Furthermore, experts expect the unit sales to rise 3% in 2014. ^[3]

The year started off poorly for Ford in Europe, but a spate of model refreshments and new introductions have helped the automaker outperform the broader market in the last few months. Ford had earlier aimed to introduce a total of 15 new or refreshed models in Europe over the next five years, but now plans to raise that figure to 25, starting with the debut of the affordable SUV EcoSport early this year. ^[4]

In addition, the European built Mustang will be introduced this year as well. The automaker is also adding a premium car Vignale to its product portfolio, which the company believes should improve its image. It is highly critical that brand Ford resonates positively with Europeans. A strong brand will help Ford accelerate sales whenever the market starts consolidating again.

Ford’s European losses have generally bettered the company’s guidance given out at the start of 2013. The automaker expected its pre-tax losses to touch $2 billion in 2013, but its three quarter losses total $1 billion. Ford expects to become profitable in Europe by mid-decade. ^[5]

Chinese Sales Keep On Surging

Ford has had a brilliant year in China. In fact, so strong have Ford’s sales in the country been that the automaker has now overtaken Honda and Toyota. Overall, Ford’s sales surged 49% in 2013 with sales up 35% in December. Vehicle sales were boosted by the introduction of seven new or refreshed models including the EcoSport, the Kuga, the Fiesta and the Mondeo, which appeal to the value seeking Chinese customers. With close to a million unit sales, China has now become one of the biggest markets for Ford. ^[6]

It is also important to note that sales growth in 2013 was unusually higher due to the introduction of a number of new, mass-appealing vehicles. The automaker should consolidate its sales from here on, but expecting the company to replicate its 2013 growth rates would be unreasonable. Thus, sales growth should inadvertently slow down in 2014. However, with a number of higher end models still to be introduced (such as the Lincoln brand), the next set of vehicle introductions could have a greater contribution towards the profits, if not towards the unit sales growth.

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1. Ford Cautions About Earnings Growth, December 18, 2013, wsj.com [↩]
2. U.S. auto sales, wsj.com [↩]
3. Car sales rise in Southern Europe lift recovery hopes, January 2, 2014, reuters.com [↩]
4. Ford’s profit goal for Europe in reach, Odell says, November 22, 2013, europe.autonews.com [↩]
5. Ford Motors 8-k [↩]
6. Ford Sales Increase by Nearly 50% in China in 2013, Setting a New Record, January 6, 2014, corporate.ford.com [↩]