Behind the Wheels of Ford Motor Company
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With $28,000 in cash and the vision to change the way the world moved, Henry Ford started the Ford Motor Company (NYSE: F) back in 1903. After a century of successful performance and consistent innovative solutions, the automaker giant has managed to sustain its competitive position. However, the current tight economic environment is blocking the way towards increased market penetration. Overall, analysts do not seem to be concerned about Ford's declining market share and remain bullish on the stock. Wall Street Journal's consensus recommendation is that Ford will outperform the market. Bank of America has placed the firm on the list of the ten best stocks for 2013 and has set a price target of $20. The main question is whether the firm will live up to analysts' expectations and follow an over 50% upside trend.
The Bad News
Over the past six years, Ford's sales have been on a roller coaster. Slow world economic growth and tight demand conditions across all of its core markets left a noticeable mark on its competitive performance. For 2006, the company reported total vehicle wholesales of 6,597,000 units. During the next three years sales kept going down at an unstoppable pace. Ford sold approximately 4,817,000 units worldwide in 2009. It ended the year with $25.5 billion of Automotive gross cash, down by 26% compared to 2007, and $34.3 billion in Automotive debt. It was only after 2010 that the company started seeing a promising rebound of its sales and net income figures. However, even though it managed to speed up its sales growth rates, it still did not reach 2006 levels. For full-year 2011, Ford sold 5,695,000 vehicles.
As a result, the company witnessed deteriorating market acceptance of its products. While in 2006 Ford claimed a 17.1% market share in the U.S. and 10.6% share in Europe, in 2011 these figures fell to 16.5% and 8.3%, respectively. As of November 2012, General Motors (NYSE: GM) was leading the way in the tough U.S. market, leaving behind Ford and Toyota (NYSE: TM). According to a recent analysis by the Wall Street Journal, General Motors is topping the charts of U.S. auto sales and holds the largest piece of the U.S. automotive pie. Ford came second with a 15.5% market share, and Toyota held the third position with a total share of 14.1%.
Toyota is recovering from a serious reputation hit caused by consumers' complaints of unintended car acceleration. The company agreed to settle and is going to pay about $1.1 billion to car owners. In order to cover the settlement costs, the car maker will have to make a one-time pre-tax charge against fourth quarter earnings.
For the first nine months of 2012, Ford's total wholesales stood at 4,134,000 units, reflecting a slight decline over the same period in 2011. Overall, Ford North America achieved increased profit and operating margin, as well as meaningful revenues of $19.5 billion. This strong regional performance was mainly attributed to higher net pricing and lower contribution costs. However, Ford Europe's weak performance continued to impose certain risks over the company's future growth prospects. Total revenue in the region decreased by almost 26% and amounted to $5.8 billion. Unfavorable market factors in Europe, including the lowest level of industry sales in almost two decades, were the main driver of unsatisfactory pre-tax results and diminished operating margins.
The Good News
Ford's future looks bright as impressive customer acceptance for the firm's newest models increases profit expectations. Ford C-MAX is the fastest-selling hybrid ever at launch. After two months on the market, C-MAX Hybrid and C-MAX Energi plug-in hybrid sales outpaced the combined sales of the Honda Insight and the Toyota Prius when launched in 2000.
Throughout 2012, Ford largely counterbalanced the gloomy demand in a tight European market, as well as the flat sales volumes in South America. The firm achieved record results in North America and improved its position in Asia. For the third quarter of 2012, Ford North America pre-tax profit stood at over $2 billion, marking an increase of $778 million compared to the same period last year. Ford Asia Pacific Africa operating margin returned to profitability as the company set market-share records in the region.
Ford benefited significantly from enlarged capacity and solid sales of the freshly launched Focus in China. In November alone, Ford China sold over 67,000 wholesale vehicles, breaking sales records for the third consecutive month. On a year-to-date basis, Ford China's sales followed an uptrend of 18%. Overall, the company ended the quarter with accelerated pre-tax profit and strong liquidity of $34.4 billion.
Moreover, the company has been consistently investing in expansion programs in order to meet customer demand and pave its way towards enhanced growth rates. During the last quarter, Ford added a shift to its Louisville Assembly Plant, as part of a broader action plan to increase its annual incremental capacity. Also, recently the company announced its intent to invest over $770 million to upgrade and expand six manufacturing plants in Michigan. Against the unfavorable European backdrop, Ford is implementing a series of actions aiming to reinforce its business transformation and restore its regional operations to profitability by mid-decade.
Stock Performance and Valuation
The stock appears to be in strong shape both technically and fundamentally. Technically, Ford has a 5-year track record of price discipline. It has outperformed the market and rewarded its faithful shareholders with meaningful returns. At the moment, the stock is trading close to its 52-week high of $12.85. Based on analysts' average target price, it has at least 13% upside potential. Fundamentally, it looks comparably attractive. EPS this year sustained a clear upward trend. In addition, its valuation metrics could indicate a possible value opportunity. Ford is trading at almost three times trailing earnings and with a 64% discount to sales. ROE figures of over 100% certify the company's ability to generate profits and place it ahead of its major peers. General Motors's ROE stands at just 18%.
However, ROE (net income divided by shareholder's equity) can often be misleading for investors. Shareholder's equity equals total assets minus total liabilities for a specified period of time, which includes short and long-term debt. Thus, the more debt a company holds, the less equity it has, which in turn could lead to a higher return on equity. Ford's debt-to-equity ratio is exceeding the industry's median while General Motors is exactly the opposite. Nevertheless, in the most recent earnings release, Ford reported the tenth consecutive quarter of positive financial performance. The firm ended the third quarter of 2012 with $24.1 billion in Automotive gross cash and $14.2 billion in Automotive debt. This translates to a net cash improvement of $1.8 billion compared to last year.
Overall, Ford remains a strong player in the space and could be considered a compelling investment. The company is aiming to reverse its market share losses and is implementing a well planned growth strategy. However, despite the general optimistic investor sentiment, I would prefer to indicate a “hold” rating. Next quarter's financial and operating results will help clarify whether the firm can sustain a healthy financial performance and increase shareholder value.
FaniKel has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!