The auto industry is recovering and Ford (F) is in a good position to benefit from the industry's comeback. The stock was trading below the 2 dollar mark in the spring of 2009, but the stock is now above $13. Several metrics such as the P/S and PEG ratios indicate that the stock could be trading below its intrinsic value. Strong demand for Ford's automobiles will help the company in the future and Ford will continue to implement the One Ford plan in 2013. Numerous factors will propel the stock to higher levels in the future.
The current macroeconomic situation in Europe isn't great and Ford's current situation in Europe also isn't great. The company expects to lose $2 billion on its Europen operations in 2013, which is on top of $1.75 billion loss that occurred in 2012. Ford expects volume to be light in the near future and pension costs are increasing. Ford's European losses have taken many investors by surprise because it happened so quickly. Although Ford's European situation is bad, it is just as bad for nearly every other automaker in Europe. GM (GM) reported a nearly $699 million operating loss in Europe, which was higher than what many analysts were expecting. Although Ford's losses have been driven mainly by factors outside of its control, Ford still needs to have a turnaround plan. Europe must be dealt with if Ford is to succeed in the future.
Other International Markets
Markets such as the Chinese and Latin American markets are crucial to Ford's long term strategy. Latin America is becoming a more important market to Ford because its middle class is rapidly expanding. Auto sales in Brazil are expected to increase 68% from 2011 to 2016 compared to a 30% increase for U.S. auto sales. However, Brazilian President Dilma Rousseff recently decided to raise the tax on imported cars from 25% to 55%. To counteract this measure, automakers such as Ford are building new factories and expanding old ones. Also, Ford's Q4 2012 volume and revenue increased by 16% and 11% in South America. Ford also announced in its Q4 2012 conference call that the outlook for the company in Venezuela isn't great due to a competitive environment and currency issues. Ford Mexican operation is also crucial to Ford's long term strategy. Ford will be building its new Fusion at the Hermosillo plant in Mexico. The Hermosillo plant will produce 62 Fusions and MKZ's per hour. China is a market that has major potential for Ford. The company announced in February that vehicle sales in China almost doubled from January 2012. Ford Focus sales last year also beat the sales of the Chevrolet Sail and the Buick Excelle. Ford also plans to boost auto sales in country this year by introducing two new SUVs, which is the industry's fastest growing segment. Ford will introduce the Lincoln brand in China next year.
The North American auto market is extremely competitive. Despite the competitive environment, Operating profit and margin in North America set records in Q4 2012. Ford's products have performed well in the United States recently. The Lincoln MKZ recently received the award for the top safety pick. However, Lincoln sales slid by 29% last month. The sales of the Fusion and the Escape have been strong recently and both models set sales records in February. Ford's U.S. sales rose by 9% in February. Truck sales were also strong last month and the sales rose by 15%. Ford was also the best performing U.S. automaker in January.
The stock has solid fundamentals. The PEG ratio and the P/S ratio are both below 1, which could indicate that the stock is undervalued. The TTM P/E ratio is 9.45, which is nearly equal to the TTM P/E ratio of GM. The forward P/E ratio is 8. As shown in the graph below, year over year quarterly revenue grew by 5.34%. The dividend yield is currently 3% and GM does not currently pay a dividend. Ford's leveraged free cash flow is also much higher than GM's leveraged free cash flow. However, Ford's total debt is much higher than GM's debt. The company expects automotive operating related cash flow to be higher in 2013. The company profited in nearly every region of the world in 2012 except for Europe. In the first 9 months of the year, the Focus was the world's bestselling nameplate and the Fiesta was the world's bestselling B car. The projected growth rate for the company over the next 5 years is 5.81%.
source: chart from Y Charts
Ford is a well managed company that stands to benefit from a cyclical upswing. CEO Alan Mullay has done a remarkable job of managing the company since 2006. Ford also has a short term advantage over GM because it is not owned by the government. The situation in Europe is bad, but Ford profited in other regions such as Asia, Africa, and South America last year. U.S. and Chinese auto sales are surging, but some regions are wild cards. Ford could break even in Latin America and the situation in Europe can worsen in 2013. Ford will face numerous challenges in 2013 such as the revitalization of its Lincoln brand, but a strong management team will help Ford to continue to perform well in the future.
source: data from Yahoo! Finance