Ford, after returning 11.6% to investors in the past 52 weeks, but only a measly 1% gain in 2013, does not get the respect it deserves from the market. Cyclical industries like Autos and especially those with decades of over capacity seldom do. With Europe in the doldrums, and China, India and Brazil not growing as fast - Ford does look like its heading for its annual summer swoon. However, keeping a longer term horizon, and believing that Ford will continue to roll out an impressive line up of new products, cut costs and build up on its brand loyalty, I believe it deserves a far higher valuation.
The Bull Case
In March, Fusion sold more than 30,000 units in the U.S. - a monthly record. Last year Toyota (TM) sold 404,886 Camry's compared to Fusion's 241,263 -- a difference of 67%. This quarter (March 2013) the gap narrowed to 25% with 100,830 Camrys hitting the road versus the Fusion's 80,558. The Camry has been Toyota's cash cow and its biggest profit segment by far. The strength of one dominant car cannot be overemphasized and for the Fusion to close up to Camry is a huge, huge achievement.
The Housing Recovery
Catalysts such as the housing recovery will continue to drive overall sales for the industry with demand picking up for pick-ups. This morning, housing starts, topped 1 Million for the first time since the financial crisis, taking it to its highest level since 2008.
This bodes very well for trucks and pick ups used in construction. In 2012, Ford's F-150 led U.S. sales at 645,316 units with closest competitor GM's Chevrolet Silverado 54% lower.
Two quarters back, analysts were predicting a 14 Million U.S. sales target for 2013, which has now geared up to the mid-15 Million mark and expected to race up to the 16.5 Million in 2015. Furthermore, the auto industry is in much better shape than it was the last time sales topped 16 Million -- Ford led by the redoubtable Alan Mullaly even more so.
With a majority of new buyers choosing cars based on their fuel economy, hybrids, and green cars are going to be solidly in demand over the next decade. Ford, second only to Toyota in this segment, gained ground with a 324% gain in sales to 21,080 vehicles in the first quarter of 2013. More importantly, Ford gained traction among younger and new users - a far bigger boost for its street cred as a green company than the growth in car sales.
The Bear Case
A Weak Lincoln
Lincoln's progress is a question mark -- even with improved availability, sales shrank 22.5% in March 2013, from a year ago, significantly denting Ford's image as the company that can do little wrong.
The Mess in Europe
Europe remains a huge challenge for all auto makers and with 21% of its sales in Europe; Ford could lose more than $2 Billion this year in this segment. No automaker is expecting Europe's economy to turn around soon, at best the only strategy adopted by the rest is to discount and maintain market share. Unlike GM and other competitors, who have baulked at a taking a coherent step towards long term profitability, Ford is not content to muddle along. Ford's turnaround strategy in Europe, after losing heavily on discounting in 2012 is now focused on reducing capacity - a tried and tested strategy in the U.S. As good as this strategy worked for its North American operations in the long run - the medium and short term hemorrhaging will cost the company dearly. Closing just one plant in Belgium, and laying off 4,300 workers is likely to cost Ford $750 Million through 2014. On the anvil are two more plants and up to 6,200 workers through 2014. Till Ford's expenses come down as planned and it does not discount as much as other European car makers, Ford's market share and profits will fall faster than its competitors.
Deserving a Better Valuation
|Company||Ford Motor||General Motors||Toyota Motor|
|Market Cap $ Bn||50.8||39.5||191.5|
|Div Yield %||3.05%||1.28%|
|WW Est Sales 2013 $ Bn||134||157||227|
|WW Est Sales 2014 $ Bn||141||167||240|
|Sales growth 2014||5.2%||6.4%||5.7%|
Sales are expected to remain flat at $134 Billion in 2013 and grow 5.3% to $141 Billion in 2014, in line with Toyota but slower than GM, which is coming off a lower base. However with operating margins of 4.85% it is more profitable than Toyota at 4.82 and way ahead of GM's 3.26%
Ford definitely deserves a better valuation, at a market cap of 38% of sales; Ford is closer to GM than the 86% of sales given to Toyota. It has made better designed products and improved quality; has much stronger brand loyalty now and addressed problems head on. The response to Europe's recession shows a focused, stronger Ford willing to take longer term strategic solutions.
All these strengths don't deserve to be overshadowed by the weakness in Europe. I think it's a great opportunity to back up the truck on this one.