This morning Ford Motor Company (F) reported its fourth quarter and 2012 full year results. The company's performance exceeded analysts' expectations on almost all metrics, as full year pre-tax profits rose to $8 billion, thanks to exceptionally strong North American sales and a healthy contribution from its financing arm. However, investors were displeased with the guidance for 2013, with Ford expecting "operating profit to be about equal to 2012," and the stock was down more than 5% in early morning trading.
Indeed, in recent months, Europe has been garnering most of the attention when it comes to discussing Ford's prospects. Most investors are well aware of the region's macroeconomic challenges, and the company's mounting losses there, which topped $1.5 billion for 2012, and could approach $2.0 billion in 2013. While it's true that it may take years for the European economy to recover, I prefer to focus on what the auto manufacturer is doing right and can control, rather than extrinsic factors that are out of its control.
Indeed, the company's remarkable growth and expansion into other regions has received much less fanfare. For example, Ford has been quietly growing its presence in Russia. It just reported that sales were up 11% in 2012, with 130,815 units sold in total. The company's best-selling car in Russia, the Ford Focus, saw sales go up 12%. More impressively, Kuga (better known as the Ford Escape in North America) and Transit sales rose 45% and 56%, respectively. The company recently began producing these vehicles in Russia through its joint venture with Ford Sollers. The company is expanding the number of dealerships, too. Five new dealerships were opened during the fourth quarter of 2012, bringing the total number to 120.
"Auto unit sales rose 10 percent to 2.935 million, reaching the pre-crisis level of 2008 and in stark contrast with Europe where sales fell to a 17-year low", according to Reuters. Russia likely has one of the oldest car fleets in Europe and is determined to modernize. Thus, I would expect sales to continue to grow at a high-single digit pace for the foreseeable future. Admittedly, this growth comes off a very low base, but the opportunity remains substantial for Ford, in my opinion.
Ford's ambitions in China are well known, as well, but investors seem to be ignoring the size of the opportunity here. Perhaps they think Ford is late to the party. Indeed, its chief rival General Motors (GM), has already been on the scene for quite some time. General Motors and its venture partners sold a record 2,838,128 vehicles in China in 2012, compared to 626,616 for Ford.
But investors need to pay attention to what the company is doing in China. Sales were up 21% in 2012. Moreover, the trend accelerated toward the end of the year, with December sales rising 43%. Ford is currently building at least four new plants in China, and plans to have a production capacity of 2.3 million vehicles in the region by mid-decade, according to its 10-k report. The automaker wants to increase worldwide sales to 8 million vehicles per year by mid-decade (up from around 5.6 million for 2012), and it will only be able to do so by succeeding in China.
Half the job may be finished: Ford is already seen as a luxury brand by many Chinese consumers, given its strong brand recognition. However, up until now the company still lacked a true luxury presence there. But executives understand that this segment is one of the fastest-growing in China, which is why the company announced it was introducing the iconic Lincoln brand into that market beginning in 2014. Not only does this move have the potential to boost margins, due to Lincoln's significantly higher price tag, but it could also help revive the brand. Many affluent Chinese have personal drivers and a Lincoln would support their luxury lifestyle.
The problem, thus far, is that Ford isn't generating any operating profits in China. Indeed, North America is carrying the entire company. The company has been investing billions of dollars in China in order to catch up with rivals and that has pushed back profitability. If these efforts pay off profits could rise substantially from where they are today.
Consider this: In 2011, GM reported $30 billion in revenue in China, and $3.2 billion in profit, of which GM received about $1.5 billion. Ford's Asia Pacific sales for 2012 were approximately $9.5 billion. In two years, they could be around 50% higher at $14.25 billion. This means the region could be generating $750 million in pre-tax profits by 2014. Even it takes a bit longer for Ford to realize its potential in China, the results could be very meaningful indeed for shareholders.
If Ford manages to pare its losses in Europe to around $750 million and achieves profitability in China by 2014, earnings per share could probably approach $2.00. This does not even take into account a rebound in the North American business to pre-crisis levels, potential share buybacks, or further debt pay down, all of which would incrementally boost earnings per share.
With 2012 now squarely in the rear-view mirror, pretty soon investors will begin to focus on 2013 and 2014 earnings-per-share projections. I strongly suspect that Ford will revise its estimate upward for 2013 over the next few months, from "about equal to 2012" to $1.50-$1.55 range. For 2014, earnings per share estimates can potentially move into the $2 range over the next few months, and if the stock conservatively trades at a 9x-10x forward P/E ratio, it could appreciate to $18-$20 a share sometime this year.
Disclosure: I am long F.