How Ford Motor Company (NYSE:F) Is Trying To Change Its Story
Ford Motor Company (NYSE:F)’s 1Q2016 exceeded expectations, helped by the now profitable European operations and the ongoing strategic product launches. Ford’s rise is threatened by rising expenses and weakness in South America markets.
This Ford analysis article closely examines the automaker’s risks and opportunities to enable you make informed investment decision regarding the stock. But first, here is a quick recap of last quarter’s earnings.
Ford Motor Company (NYSE:F) posted adjusted EPS of $0.68 in 1Q2016, which rose from $0.29 in the corresponding quarter a year ago and topped the consensus estimate of $0.43. Revenue of $37.7 billion increased from $33.9 billion in the same period last year and outpaced the consensus estimate of $36.10 billion.
The chart below depicts Ford’s quarterly revenue and cost of revenue for the last five quarters:
What’s exciting about Ford?
- Global expansion plans
Ford Motor Company (NYSE:F) is on a global expansion tear as the automaker seeks to boost capacity and sales in the coming years. As part of its South American expansion, Ford recently announced plans to build an assembly facility in Mexico and it has earmarked $1.6 billion for the project. South America has been a particularly challenging market for Ford in the recent years thanks to unfavorable forex terms, shifts in trade policies and economic slowdown. That explains why Ford is trying to shore up performance in the region with fresh investments.
Ford also plans to invest an additional $223.9 million in its Romanian assembly plant located in Craiova. The investment is designed to equip the Craiova facility for the production of 3.5-liter EcoBoost engine to be used in the 2017 Ford F-1.
In order to support its Middle East and Africa growth strategy, Ford recently announced plans to invest $170 million to expand its assembly plant in Silverton, South Africa. The South African investment is particularly aimed at boost the production of Ford Ranger and Everest. Still in Africa, Ford also began assembling vehicles in Nigeria to serve the local market. The Nigeria assembly plant boasts a capacity of 5,000 units annually.
Ford is also expanding footprint in Asia Pacific. It has several expansion plans underway in China and its integrated manufacturing plant in India opened in 2Q2015. Ford hopes to increase its vehicle sales in India to 1.6 million units in 2018 from 1.1 million units sold in the country in 2014.
2.The One Ford plan
One of the missions of the One Ford plan is to produce common vehicle models for all of Ford’s global segments. The other part of the plan is to create more vehicles from fewer core platforms. One Ford plan is also being leveraged as the answer to Ford’s challenges in Europe and South America.
Under the One Ford plan, the automaker has outlined an ambitious product rollout. For example, the company hopes to launch 12 vehicle models globally this year with eight all-new or refreshed vehicle models in Europe. In the five year period between 2012 and 2017, Ford hopes to would have launched 25 new vehicle models in Europe. The aggressive European vehicle launches is expected to boost sales in the continent.
In the Middle East and Africa, Ford hopes to launch eight new vehicles by the end of 2016 and open nearly three dozen dealerships in the regions in the coming two years.
3.Best US sales since 2006
Ford Motor Company (NYSE:F) is seeing strong demand for its vehicles in the U.S. as demonstrated by unit sales in the recent quarters. In 1Q2016, U.S. sales rose 9% to 645,626 vehicles, marking the best quarterly sales for the automaker in domestic market since 2006. The solid 1Q2016 U.S. sales built on a similarly strong 2015. Ford sold more than 2.6 million vehicles in the U.S. in 2015, marking the best annual sales for the company since 2006.
Ford is also seeing strong demand for its vehicles internationally as Chinese vehicle sales International sales rose 14% to 314,454 vehicles in 1Q2016 and European sales increased 8.5% YoY to 363,500 vehicles.
Ford is looking for a repeat of 2015 in 2016 in terms of financial performance. The company hopes that its earnings and revenues in 2016 will be at par or higher than the 2015 levels. In particular, the company expects North America, EMEA and APAC to be all profitable in 2016.
5. Electric vehicles program
Ford Motor Company (NYSE:F) has drawn up a plan whereby it wants 40% of its vehicle portfolio to be electric vehicles by 2020. Toward that end, the company is funneling increasingly more resources to its electric vehicle program. For example, last year the company outlined a plan to invest $4.5 billion in electric vehicles by the next five years.
With growing concern over fossil fuel related environmental pollution, Ford is hoping that demand for hybrids and fully electric engines will remain strong over the coming years. The recent signing of the Paris climate deal is adds to the growth potential in the electrified vehicle market.
6.Strong shareholder orientation
Following its exceptionally strong financial performance in 2015, Ford decided to set aside $1 billion for supplemental dividend that is it equal to $0.25 per share. That special dividend will be on top of the sweetened quarterly dividend. Ford boosted its 1Q2015 dividend by 20% to $0.15.
The recently announced supplemental dividend demonstrates Ford’s healthy cash and liquidity position.
What’s worrying about Ford?
- Weak South American market
Ford Motor Company (NYSE:F) is struggling with a myriad of challenges in South America and the region is expected to continue generating losses. The company expects to suffer a larger loss in South America in 2016 than $832 million in 2015. Ford’s South American operation has been generating pretax losses since 2013.
2. Rising structural costs
Ford Motor Company (NYSE:F)’s structural costs have been rising as the company renews its portfolio and expands capacity. While these investments are building for the future prosperity, they are causing near-term pressure on earnings. Ford’s structural costs have been rising steadily since 2013 and hit $432 million in 1Q2016.
3. Exit from Japanese market
A push has come to a shove for Ford in Japan and Indonesia. As such, the company is planning to fold up operations in the two Asian markets by the end of this year. Penetrating Japan and Indonesia has been nearly impossible for Ford. The company controls a paltry 0.1% of the Japanese auto market and only 0.6% of the Indonesian vehicle market. Japanese automakers control the two markets.
4. Massive vehicle recalls
Recent years have seen Ford Motor Company (NYSE:F) recall millions of vehicles to fix safety problems. But recalls have adverse impact on customer confidence. Moreover, recalls increase expenses, thus putting pressure on profit margins.
5. Regulatory risks
Ford is being investigated by the regulator for several issues. Such investigations could not only give way to costly litigations and settlements, but they also tend to distract the management from proper execution, thus limiting gains.
Investing in electric vehicles positions Ford Motor Company (NYSE:F) well for the future of automobile industry.
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