Ford is Steering Ahead
Eshna 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) posted strong February sales numbers with 9% year over year increase, outpacing the overall U.S. auto industry growth of 4%. This is the highest growth rate amongst all the major players in the U.S. auto industry. Ford’s numbers were lower than the 11.9% that analysts at TrueCar.com were expecting, but this does not take anything away from the company. Rather, the solid results reinforce my faith in Ford’s solid growth trajectory. Its valuation remains very attractive, and offer a solid proposition for the investors.
The U.S. auto industry trends
There was significant momentum in the sale of new cars and trucks in the U.S. The industry was facing strong headwinds from soaring gas prices, which rose to $3.78 per gallon in February, as well as higher social security taxes which are denting people’s disposable income. Despite the odds, vehicle buyers were not deterred and volumes rose a solid 4%. Annualized sale of cars and trucks was pegged at 15.4 million, higher than the 15.1 million expectations of economists polled by Thomson Reuters.
February was the fourth month in a row where the annualized sales mark was above 15 million units, reflecting a steady recovery in market conditions. It is estimated that the average age of a passenger car on the U.S. roads is around 11 years, and many are due for replacement sooner or later. This makes a solid case for the prospects of the U.S. auto industry, and has left all automakers scrambling for a piece of this pie.
Ford’s solid 9% increase was driven by the 15% rise in sales of F-series pickups. These full size pick-ups have been America’s best sellers for over a quarter of a century, and are still sitting on top of the charts. It is worth noting that 2013 is the last year for the existing models, which are slated for a makeover in 2014. Ford has done well to consistently refresh its product line and scores over General Motors (NYSE: GM), which has one of the most aged line-ups in the U.S. auto industry.
GM is also planning to renew 75% of its entire range within the next couple of years, but that is a story for another day. Meanwhile, Ford has posted impressive numbers for its Explorer, Escape, and Fusion models, which were up 59%, 29%, and 28%, respectively. The company sold 195,822 vehicles in February. In the second quarter, the company is planning to increase its production by 9% in North America.
GM has also posted robust growth, clocking 7% sales growth over last year and selling 224,314 vehicles. The company said this has been its best February since 2008. The key performer was the Chevrolet Silverado pickup, which saw a 29% increase. In order to maximize gains from the strong demand for trucks, GM is offering free scheduled maintenance for two years or 24,000 miles on its full-size Chevrolet and GMC trucks.
The offer is valid till April. GM’s Cadillac and Buick also recorded impressive increases. Chrysler’s results were less exciting, with the company posting 4% sales growth and sold 139,014 vehicles. Given that last year the company had fuelled enthusiasm with its 21% sales growth, the results this February were quite a dampener. The discontinuing of the Jeep Liberty midsize SUV was cited as the key reason.
All three big Japanese automakers – Toyota (NYSE: TM), Honda, and Nissan posted relatively weaker results. Toyota was up 4.3% with 166,377 vehicles sold, while Honda was down 2% with 107,987, and Nissan down 6.6% with 99,636.
Reversing its usual pattern where truck sales trail car sales, Toyota gained from the strong truck market posting 16% rise in SUVs and trucks, while losing out on its cars which were down 3%. Toyota has a 6.3% share in the U.S. truck market, dominated by Ford with 39.9%, GM with 35.6%, and Chrysler with 18.2%. The company recently unveiled its 2014 Tundra full-size pickup truck.
Ford’s valuation is the key
While Ford outpaced the industry in February sales, its valuation has remained relatively inexpensive compared to the industry, thus increasing its appeal as a value proposition. At the current stock price of around $13 per share, Ford has a PEG ratio (5 yr expected) of 0.86 compared to industry average of around 1.3, and forward P/E ratio of 7.59 as against the industry average of 11.6.
This implies that Ford’s current valuation does not factor in the upside that the stock has to offer. With an attractive line-up, the company is solidly positioned to gain from recovering U.S. economy in the long-term and the strong demand for trucks in the near to medium term. The February numbers provide ample evidence regarding that.
tinade 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!