Which Automaker Will Drive Your Portfolio?
tarun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ford’s (NYSE: F) recently reported fourth-quarter results turned out to be quite solid, but not all was well with The Blue Oval. Although the company earned $0.31 per share and beat consensus estimates of $0.26, a pessimistic outlook for its European business sent shares down 5%.
Let us take a look what the company has in store for investors and how does it plan to address the European conundrum.
Ford revenue grew 1.9% from last year to $36.5 billion in the quarter, ahead of analyst estimates of $33.17 billion. Net income for the quarter was $1.6 billion, $565 million higher than last year excluding the effect of deferred tax assets. Both the top line and bottom line numbers are strong, but slightly lower in comparison to FY11 as Europe’s losses have increased further this year.
How bad is Europe?
On the face of it, Europe has been bad for Ford. In the last quarter the company lost $732 million compared to a loss of $190 million in the same period last year. In 2012, Ford has lost $1.75 billion while the expected loss was around $1.5 billion. The company projects that the losses will further swell to $2 billion in 2013.
Europe’s impact on the company’s profit is entirely because of macroeconomic factors that are not controllable. So I believe it’s better to focus on what Ford is doing to overhaul its operations in Europe. It has closed down three factories in Europe to lower costs and make each unit it sells in that region profitable. The company can further add new vehicles to its current offerings in Europe at a lower cost, which should eventually help its bottom line irrespective of the economic condition of the continent.
The silver lining
Ford’s conditions in Europe should be better as management’s turnaround strategies should deliver, but it will take time. Now let us focus on the company’s growth and expansion in another region. The company has grown in Russia as sales surged 11% in 2012, selling 130,815 units during the year. It recently started producing Kuga and Transit in Russia through its joint venture with Ford Sollers. The response for both the cars has been very good and should further help the company improve its revenue from the region.
Ford has ambitious expansion plans in Asia, especially China. At the moment, the most populated country in the world is not very profitable, not even to the market leader General Motors (NYSE: GM). In 2012, Ford sold 626,616 vehicles while its rival GM, along with its partners, sold 2,838,128 units. Investors might feel Ford is too late in entering the Chinese market but it is not so. The company’s sales in 2012 increased 12% in China and the trend increased more towards the end of the year with sales in December surging by 43%.
Moreover, Ford has a strong brand image in China and it is seen as a luxury brand out there. The company will be introducing its iconic Lincoln brand in China in 2014 which should go well with the lifestyle of the affluent Chinese population. Lincoln’s high price tag should boost company’s margins. Further, the company’s revenue should improve as it has the right set of products to match the rising demand of SUV’s in China.
The company’s performance in North America has driven it to safe roads. As expected, the company posted pre-tax profits of $1.87 billion in its fourth quarter. Ford’s revenue in the U.S. might have been slightly up, but a hike in sales of high-margin pickup trucks has boosted its profit. The company’s North American segment is currently the driver that is financing its growth prospects in Asia and making good its losses in Europe.
A dig into the competitors
Ford faces competition from the likes of Toyota (NYSE: TM) and GM. Currently Toyota is facing some troubles with their acceleration issues, failing brakes, and numerous recalls over the last few years. The company has also been losing market share in China, but all this did not stop the company from selling 9.75 million vehicles last year and becoming the largest automaker across the globe.
Moreover, Toyota’s top position in the auto industry places it in a better position to bargain with the Bank of Japan for obtaining assets in order to keep its expansion drive running.
General Motors, though, have lost the crown of being the largest global automaker but there is a lot to like about it. It is the market leader in China, and has three models in the list of top five cars. Also, the company is planning a lot of new cars to boost its business. Redesigns of the Chevy Silverado, Chevy Impala, GMC Sierra, and a new Chevy Corvette will be in the market soon. The Buick Encore, the Suburban, Tahoe, Yukon, and Escalade are expected to hit roads by the first half of 2014.
Ford is going strong in the American market and gaining share in China. Although the company is currently not being able to generate any operating profit in China, as it is investing heavily to catch up with its rival, the current investments should reap benefits in two to three years’ time.
Leaving aside Europe, due to gloomy economic conditions, even if the company is able to break-even by 2015-2016 it will add another $1.5 billion to $2 billion to its current pre-tax profits. With the company’s turnaround strategies the target seems achievable.
Overall, Ford is doing well and its performance should improve further in the near future. For the investors I would say, “There is a lot to look beyond the European crisis and be happy about.” I am bullish on Ford and for me it is a good value at its current price.
tarunbachhawat 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!