How Sensitive Is Ford Motors To EBITDA Margin Changes?

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Ford Motor

Ford Motors (NYSE: F) is likely to be materially impacted by the imposition of tariffs on the U.S. auto imports. The company has a substantial portion of its production facilities in the international markets which cater to the demand of its North American division. Ford’s stock price has tumbled by around 3% since the threat of tariffs was revealed recently. In this note, we shall look at the impact of a decline in the company’s margins on its share price.

Ford receives 20% of its U.S. demand through production facilities in Canada and Mexico. Hence, a 25% tariff on U.S. imports would either hit the company’s margins or its sales volume in case the cost burden is shifted on to their consumers. Currently, most of the North American automobile giants, including Ford Motors, have been struggling from a weak automobile demand environment in the region. Changing consumer preferences towards SUVs, pickups, and crossovers, and a declining passenger car market is lowering the demand for the sedan variant offered by most of these auto companies. Thus, in such context, an increased tariff on auto imports would prove to be extremely detrimental for North American auto companies.

To understand the implication of this, we have created a scenario to exhibit the marginal impact of a 1% decline in the company’s EBITDA margin on its 2018 fair price estimate. As per our analysis, a 1% decline in the company’s EBITDA margin results in a 16% decline in its fair price estimate, implying the strong sensitivity of the company’s valuation to its margins. Thus, if Ford decides to undertake the cost burden of the threatened tariffs to protect its sales, it would imply a significant correction to its current share price to reflect the new information and would prove to be highly unfavorable for the company.

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The auto industry in the U.S. is already operating under an environment of high cost with the imposition of stringent tariffs on U.S. steel and aluminum imports. Ford has recently announced a change in its operational strategy to focus on its more profitable trucks, utilities, and commercial vehicle segment to operate in a more cost-efficient manner. However, the imposition of import tariffs would hinder the company’s aim to achieve cost efficiency by raising the company’s overall cost and impair its long-term growth prospects. In case you do not agree with our estimates, you can use our interactive dashboard How Sensitive Is Ford Motors To EBITDA Margin Changes to modify our estimates and understand the sensitivity of the company’s margins on its overall valuation.

 

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