Drive This Automaker for Long Term Gains
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The automotive industry is a very tough one, and global economic conditions are not positive for the sector, especially in Europe. However, Ford (NYSE: F) has steadily made progress during the last few years: the company has streamlined operations, launched more competitive vehicles and improved its finances in a big way. Trading at a discounted valuation, this iconic American brand is very well positioned for a road to profits in the following years.
Problems in Europe
Europe is a complete mess for automakers, sales at Ford’s European unit were down 15% on the year, slightly underperforming the 12% decrease of the overall market, as demand for new vehicles in the region continues to shrink. The company has warned that we shouldn´t expect a turnaround in that region anytime soon, so Europe will be a drag on profitability for some time.
General Motors (NYSE: GM) is perhaps doing even worse in the old continent, the company announced last quarter that it had lost $361 million in the region, and management expects the situation to continue to deteriorate over the next quarters. There is no sign of a rebound in automobile demand from Europe at this point, and both American automakers need to compete with local companies like Volkswagen (NASDAQOTH: VLKAY) which has a huge local presence, a very recognizable brand in the region, and a reputation for producing highly durable vehicles at competitive prices.
We can´t see any light at the end of the tunnel for the Europe so far, but there will be one, we just don´t know when. Once the European situation stabilizes and starts getting better, Ford should report much better profitability figures. The good news is that vehicle sales in Europe have been lackluster since 2008; this means the car fleet is getting older, so the recovery should be a strong, when it comes.
An Improving Business
Ford has made an impressive comeback in North America since the last recession; the company has successfully revamped its models, demonstrating to the public that it can build better and more efficient vehicles. The Ford brand has been gaining consideration among customers in a steady way over the last years.
Ford has recently resumed its dividend and its debt has been drastically reduced since the crisis, so better products are being translated to bigger cash flows and a healthier financial shape. The company is investing heavily to increase operational efficiencies by building more models on common platforms; this will generate economies of scale, important cost reductions, and more flexibility to adapt to changing consumer demand for different models.
Japanese competitors Honda (NYSE: HMC) and Toyota (NYSE: TM) are recovering from the devastating effects of the earthquake in Japan, so in the upcoming quarters they will likely regain some of the market share they lost in the US during the that period. However, Ford is in a much better competitive position against them now, and it has operational and financial strength to defend its home market.
Opportunity in China
China is a very interesting possibility for the company. Ford has been lagging General Motors in the Asian giant, but the company is investing heavily to recover lost ground as soon as possible. Ford plans to introduce 15 new models in China by 2015, and is building five new manufacturing facilities and bringing its Lincoln luxury brand there in 2014.
The recent surge in anti-Japanese sentiment has produced steep declines in sales for Honda and Toyota, and Ford sold a record amount of cars in the country during September at almost 60,000 units. Ford is still small in China, but investing heavily to expand in the country, and local consumers seem to like its models. China could be a huge growth driver for Ford over the next years if the company executes as expected.
Attractive Valuation for Long term Investors
The road ahead for Ford may remain bumpy in the following months, since profit margins will remain under pressure due to economic problems in Europe. But on a longer time frame, things look much better. The company is going on the right direction by improving its products and working on internal efficiencies, and the shares are dirt cheap at a forward P/E below 7. Long term investors should hop on this iconic automaker driving towards better times ahead.
Interested in Additional Analysis?
Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford’s stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of The Motley Fool’s top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.
acardenal owns shares of Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.