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By: Ahmed ishtiaq

Ford Motor Company (NYSE:F) manufactures automobiles under its Ford and Lincoln brands. The company has about 16% market share in the United States and more than 8% share in Europe. Ford and Lincoln brand sales in North America and Europe made up 59% and 26% of 2011 auto revenue, respectively. Economic conditions have not been ideal for car manufacturers, especially after the financial meltdown of 2008. There are still concerns about the global economic growth. However, I believe car manufacturers will have a better year.

The U.S. economy has started showing signs of recovery with a positive impact on the auto industry of the country as well. An improving economy should enable the company to increase its revenues over the next year. Over the past three years, the company realized that it needed to change its strategy to recover its market position. As a result, we have seen a major shift in the strategy employed by Ford, and it has helped the company make a turnaround.

Change in Strategy

A radical change in the strategy was needed in order to bring Ford back to its previous heights. The company was given a new direction, and new targets were set for the management. The company plans to increase sales to 8 million vehicles a year by the mid of the current decade. The "Ford One" plan has helped the company manage its operations efficiently and increase margins. Ford is using a single manufacturing operating system that has improved efficiencies and helped the company achieve better capacity utilization.

By 2015, the company will be able to produce 25% more vehicle derivatives per plant due to the new production process. The new production process allows the company to achieve flexibility in operations without sacrificing the quality of products. The company has turned its focus to smaller fuel-efficient vehicles, which should help the company compete well in the market. Ford will be better positioned globally due to these small and fuel-efficient vehicles. The company is also focusing on cost reduction, which should decrease the pressure on its earnings.

Improving Revenues and Margins

Despite lower revenues during the past twelve months, the gross profit margin has remained over 16% for the company due to a decrease in costs. The company has sold about 2.2 million vehicles during 2012 and December sales were the best for any month since 2006. At the end of last quarter, the company achieved best-ever automotive pre-tax profit and automotive-related cash flow. A focus on cost reduction and efficient operations is helping the company improve its margins. For a short while, the company was not able to meet customer demand due to a decline in production.

However, I believe there will not be any such problem in the future. The company is currently in the process of increasing production from the same plants through operational efficiency. At the end of last quarter, Ford North America achieved its highest quarterly profit and operating margin since at least 2000. The pre-tax profit for the period stood at $2.3 billion and operating margin at 12%. Improving margins are a clear indication of efficiency. Third-quarter operating margin for Ford was the best in its industry.

Future Demand

Demand for cars and trucks is on the up at the moment. Th eU.S. economy is recovering and the automobile sector is proving to be an important component of the recovery. Different firms have predicted an increase in demand over the next year. According to R.L. Polk & Co, new vehicle registrations will be up by 6.6% during 2013. R.L. Polk & Co is predicating sales of 15.4 million vehicles during the next year in the U.S. Furthermore, global car demand is going up, and the only concern is the slow growth in Europe. Other countries such as Brazil, China and India are expected to record impressive growth during 2013. However, North America is still the most important region for Ford. For the third successive year, Ford was the leading seller in Canada, indicating solid presence of the company in its major markets.

Comparison with Peers

Ford peers include Toyota Motor Corp (NYSE:TM), General Motors (NYSE:GM) and Honda Motor Co Ltd (NYSE:HMC). The table below lists the important metrics for these companies.

F

TM

HMC

GM

P/E

3.1

17.5

17.9

11.2

P/B

2.7

1.2

1.4

1.5

P/S

0.4

0.6

0.7

0.3

EPS Growth

N/A

N/A

15.80%

N/A

Operating Margin

4.30%

5.00%

4.80%

3.20%

Net Margin

13.40%

3.50%

3.70%

2.90%

ROE TTM

142.50%

7.20%

7.70%

13.50%

Debt to Equity

3.80

0.60

0.50

0.3

Source: Morningstar

Currently, the stock is trading at a discount compared to its peers based on the P/E ratio. Furthermore, Ford has the best margins compared to its peers, indicating that the new strategy is working for the company. However, the debt-to-equity ratio is extremely high for Ford.

Summary

The American economy is recovering which is lifting the demand for vehicles. I expect the demand for vehicles to be higher than 2012 during the next year. The strategy of reducing costs and focus on smaller cars is playing in favor of the company. As a result, Ford is displaying the best margins in the industry. Ford has also taken steps to counter a delay in production and meet consumer demand. Ford South Africa will increase its engine production capacity in order to meet the demand in North America during the first quarter of 2013. I believe Ford will be one of the winners in 2013 and the company will make a massive come back.

Source: Ford Will Make A Turnaround In 2013