It is not news that both Ford's (NYSE:F) management and shareholders are increasingly worried about the negative effects of Abenomics and yen depreciation on sales and stock performance. In the words of Alan Mulally, Ford's CEO (March, 26th):
The markets should determine the exchange rate. (Japan is) ... the most closed automobile market in the world (...) They should open up their market, they should restructure their industry, and that's why we're encouraging the people negotiating the free trade agreements that they deal with that.
I did not analyze the effects of yen depreciation in my earlier bullish article Ford: 5 Reasons Why This Stock Is A Buy. That does not mean that I deny the existence of Abenomics, or the positive effects on the Japanese export industry. For example, in Toyota Is A Buy: The Samurais Are Back, I analyzed in detail how Abenomics is causing Toyota (NYSE:TM) to beat the indices: stock is up 50%+ since Abe took power and there are no signals of a correction in the near future, as inflation expectations continue strong in the island of the rising sun.
That being said, a careful analysis on the relationship between the performance of certain currencies and Ford makes me believe, contrary to what many think (for example, see this excellent article by Paulo Santos or, even better, refer to the words of Ford's CEO in the first paragraph), that yen depreciation is not a strong catalyst here.
Main Thesis (quick take): Although yen depreciation is not making life easier for Ford, it does not pose a major risk to the firm. This is due to 3 reasons:
- First, there is no evidence of a strong historical negative correlation between Ford's stock price improvements and yen depreciation in the past 8 years.
- Second, Japanese automobile makers manufacture a substantial amount of their cars in the U.S. Therefore, a significant proportion of their costs involve dollars.
- Third: Yen depreciation is not the only macroeconomic trend to be taken under consideration. Yuan appreciation could help Ford to offset the negative effects of yen depreciation.
1. Ford and Yen depreciation
Contrary to what many think, there is no strong correlation between Ford's stock underperformance and yen depreciation. In the figure below, I show movements in the stock price of Ford (blue), Toyota (red) and the USD/JPY between 2004-2013.
Notice that, as it is common knowledge, the period of yen appreciation between early 2009 and mid-2012 is associated with better performance for Ford and worse performance for Toyota. However, periods of yen depreciation are not always associated with worse performance for Ford and better performance for Toyota. For example, the period between late 2012 and early 2013 shows that both Toyota and Ford are positively correlated with a weaker yen. The 2006-2007 period also shows weak yen and a good performance in both stocks, although Toyota's increase in stock price is far more pronounced.
Therefore, the statistical relationship between Ford's stock, Toyota's stock and the yen is more complicated than what it seems like at first glance. It is interesting to notice that yen appreciation is correlated with (relatively) worse performance of Toyota; but yen depreciation is not correlated with (relatively) worse performance of Ford:
Periods of yen depreciation are not strongly correlated with periods of better Toyota's performance and worse Ford's performance.
2. More than 7 million Japanese cars are actually "made in America"
There are 2 ways by which yen depreciation could, in theory, benefit Japanese automakers:
Effect 1: Assuming repatriation of funds, a cheaper yen makes sales in the U.S. more profitable.
Effect 2: Lower production costs, assuming Japanese cars are made in Japan.
However, Japanese carmakers make their cars in America, which is Ford's biggest market. By manufacturing their cars in the same market as Ford does, they engage into similar variable costs (wages). Therefore, yen depreciation doesn't automatically translate into lower costs.
Yen depreciation would translate into lower costs if a given Japanese automaker produces a significant part of its components in Japan. And as far as I am concerned, only Toyota has a significant part of its car components made in Nagoya.
3. China and Yuan appreciation
Just like a weaker yen can makes sales in the U.S. more profitable, a stronger yuan can make sales in China more attractive, therefore helping Ford to offset undesirable effects of yen depreciation.
Notice first that yuan appreciation is a fact, as the graph below shows. Roubini Global Economics forecasts that this trend will continue in the next years, with the USD/CNY possibly reaching 6.13 by 2013Q4. For more information about yuan appreciation, refer to this article by Gary Bourgeault.
Second, Ford is doing incredibly well in China. April 2013 wholesales reached 75,331 vehicles, up 37%; year-to-date sales reached 261,927 wholesales, up 49%; and the company expects to sell 1.2 million vehicles by 2015, making this the company's most rapid expansion in 50 years. Yuan appreciation is causing the value of these sales to be dearer in dollars.
Furthermore, although Ford is planning to open more factories in China, a great proportion of the cars sold there (unlike General Motors (NYSE:GM)) are proudly made in America. Finally, China is an amazing opportunity for Ford not only because of yuan depreciation or because Chinese love the brand, but also because a strong negative sentiment against Japanese products reduces the competitive advantage of Japanese automakers in the most promising auto market in the world.
Price target: $20
Rating: Buy / from Buy
Investment Horizon: 1 year