Don't Be Worried About Ford’s European Losses
Eshna is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The outlook for Europe seems to be worsening, but the investor community might have overreacted a little at Ford’s (NYSE: F) new guidance for Europe. The 5% slump in Ford’s share prices that followed a solid fourth quarter performance was probably carrying things a little too far.
It is a well known fact that a recovery in Europe is still nowhere in sight. As estimated by the European Automobile Manufacturers’ Association, or ACEA, the total vehicle registrations in 2012 has fallen to its 19 year low of 12.5 million. 2013 is hardly going to be any better, if not worse. So all automakers, including arch rivals General Motors (NYSE: GM) and Chrysler, will be sweating it out in Europe just like Ford. Besides, Ford has revised its guidance down by only $25 million. It now expects European losses to be $2 billion instead of the earlier estimate of $1.75 billion, which really does not change things this way or that.
There are enough things that are going right for the company at the moment. First of all, CEO Alan Mullaly’s “One Ford” strategy has been a huge success, and the results from the US operations have started to show. Through capacity optimizations and a well-balanced range, the turnaround that the company achieved is unprecedented. It is noteworthy that while both General Motors and Chrysler had to be bailed out by the government in 2009, Ford managed on its own. So if it can happen in the US it can also happen in Europe. The company already has a formulated plan for European restructuring along the lines of the US, which it announced in October last year, and that plan is already in action. Ford will be shutting down three factories, accounting for around 18% of its total European capacity, and will concentrate on introducing more fuel-efficient models. In fact a quarter of the $2 billion European loss guidance is attributable to restructuring costs alone.
It is a little surprising that Ford has pegged its North American operating margins for 2013 at 10%, lower than the 10.4% posted in 2012. Ford's F-Series pickups are ruling the market, with January sales up by 22% over last year. This is the company’s most profitable line, accounting for the lion’s share of profits globally. So, it could be that Ford is factoring in the increased competition in this segment from General Motor’s new lineup due in Spring, as well as Toyota’s (NYSE: TM) new Tundra, which will hit the market shortly. Chrysler is not lagging behind either, with its new RAM looking good. Whatever the margins might look like, one thing is for sure--Ford will continue to gain market share and make money in the US. The new Fusion sedan, the Escape SUV, the Fiesta, and the Focus are all doing solid business.
The company is doing great in China as well. The Ford Focus has already been pronounced as the best selling passenger car of 2012, way ahead of any other passenger car made in China. The boycott of Japanese cars in China in the second half of 2012 has helped by allowing a competitive edge over the likes of Toyota, Honda, etc. For instance, thanks to these boycotts Toyota’s sales were 25% below expectations. Meanwhile, the “15 by 15” strategy that Alan Mulally has devised for China looks quite promising if performance of the Focus is any benchmark. As part of this strategy the company plans to introduce 15 new Ford models by 2015. It is well accepted that Ford has entered China much later than other car companies like Volkswagen and General Motors and has to catch up a lot. However, Ford is leaving no stones, unturned with its investments in China already crossing the $5 billion mark. The company’s third assembly plant in Chongqing is expected to commence operations in late 2014, while the Hangzhou plant should be operational in 2015. Despite slowing down, the Chinese market is still growing at a decent rate and Ford is well-positioned to reap rewards.
All in all, whatever Ford stands to lose in Europe there are enough good things happening elsewhere that the company as whole remains as solid as ever. There is a lot that the investor community expects from the Blue Oval, and they should not be disappointed.
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