This Car Maker Is Cruising

ANUP is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Ford (NYSE: F) has a habit of performing well above any bar that’s set ahead of it. The company's growth has been strong across the board, by and large, where each geographic region has demonstrated visible improvements in performance metrics. The second largest US automaker declared its quarterly results a few days back, and needless to say, it beat both revenue and earnings estimates by appreciable figures.

Revenue & earnings

As a result of volume climbing up 16% to 1.67 million vehicles, compared to the year-ago quarter, and increases in market share in all regions where the company commands a presence, the total revenue for the quarter stood at $38.1 billion, which beat consensus estimates by $2.7 billion. Newer models in all markets also contributed to increased volumes and market share.

Also, the South American and European markets performed better this quarter and this added to the increase in revenue and market share. Some of the gains were offset partially by higher costs and unfavorable exchange rates, primarily in South America.

The inherent strength of the ‘One Ford’ strategy, lean cost structure and agile execution capabilities are the key strengths that enable Ford to maximize its gains in each of the markets where it has presence. Ford managed to achieve a break-even point in all of its international markets combined together, compared to a $600 million loss in the first quarter.

With improvement in automotive margin to 6.4% from 4.9% a year ago, the company posted an impressive 50% gain in earnings per share to $0.45 as compared to $0.30 a year ago, beating consensus estimates of $0.37. This was the 16th consecutive profit making quarter of the company, as operating profit stood at $2.6 billion.

Prospects

Traditionally, Ford has always derived most of its sales and profits from North America. The US economic growth rate is expected to be in the 2.5% range with automotive industry sales being supported by the improvement in the housing sector and also the demand generated due to aging vehicles in the US market.

As the company witnesses encouraging results from its investment in Asia and other emerging markets, it is making rapid strides away from home also. Ford has announced two new engine plants, one in China and the other in Russia. It plans to have a full portfolio of vehicles in China, aiming to introduce 15 new vehicles in China by 2015, as it has set ambitious plans for China. In China, the company improved its market share by 1.5 percentage points to a quarterly record of 4.3%, fueled by strong sales of the new Focus, Kuga and EcoSport SUV, and this is expected to grow further as the company is quickly adapting to what would suit the Chinese market.

The company showed profitability in South American markets and reduced losses in Europe. Although business conditions in Europe remain uncertain, but the company is aiming to return to profits by 2015 and is going through a restructuring exercise. It has also increased its market share to 8.1% from 7.6%, which is significant. This is the first year-over-year gain in the last year.

Companies only go on a hiring spree when the future looks bright. Ford recently revised its workforce requirement from 2,200 earlier to 3,000 now. It will be hiring 800 more engineers, computer specialists and other salaried workers in the U.S.

All in all, the future looks bright.

Competitors

‘The Big 3’ (Ford being one of the three) — together hold 46.1% of the domestic market, which is up by a full percentage point as compared to last year. So the other two, obviously, would be competitors that deserve a look and they are General Motors (NYSE: GM) and Chrysler, a subsidiary of Fiat (NASDAQOTH: FIATY.PK)

Despite indications of the Chinese economy slowing down, GM sales in China have now surpassed the total number of vehicles the company is selling in its home market, the United States. So, it would not be incorrect to say that General Motors’ biggest market is now China. Sales in China surged 10.6% to 1.6 million in the first half of 2013. General Motors is also expanding its footprint in emerging markets such as China, Brazil, and India. However, GM also faces challenges from the ongoing Euro-zone financial crisis.

GM reported earnings of $1.4 billion recently, which works out to $0.84 per share, beating the consensus estimates by $0.06 per share. However, earnings did see a decline of 6.7% as compared to the year-ago quarter, which was at $0.90 per share.

GM is trading at about 8.42 times its forward earnings. Compared to this, Ford is trading at about 10.3 times, and it offers an attractive dividend yield of 2.4%. Like Ford, GM’s P/E looks better than the industry average (8.0 against 14.2), and its lower valuation seems justified on a forward basis since it does not have a dividend. 

Chrysler is a consolidated subsidiary of Italian auto maker Fiat. The Italian automaker also holds a slew of renowned brands like Alfa Romeo, Ferrari and Maserati. Fiat has a proud history to boast of, which dates back to 1899 and includes selling cars in more than 40 nations across the globe.

Chrysler posted revenue of $15.4 billion in the first quarter, a drop of 6% from a year ago. The company is slated to attain a delivery target of 2.6 million to 2.7 million vehicles in 2013. The Fiat brand reached sales of 100,000 units in May, which is an important milestone for the company in North America.

Chrysler posted an 11% gain for July, selling 140,102 vehicles. Total Chrysler Group sales, which include the Fiat, Jeep, Dodge, Ram and Chrysler brands, are up 9% year-to-date. Fiat generated 75% of its operating profits from America and hence is also considering moving its HQ to the U.S.A. as per reports from Bloomberg

Conclusion

Ford has a solid business model. It also has abundant resources at hand to capture new growth opportunities, and it has been doing the same through expansion into emerging markets. No wonder it is an investor's delight, and it would be worthwhile investing in this company.

China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.


ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure