Ford Motors (F) has shown its capacity to grow in the challenging conditions by reporting impressive earnings. The operating margins have shown a drop but in the face of a slow global market scenario, Ford has responded very positively by capturing the market's interest and improving demand for its products.
The improvement in U.S. housing sector coupled with the decent recovery of performance in Asian markets is going to form a likely upside in the future. On the other hand, the company has recognized the European debt and austerity situation, and increased risks associated with Argentina, and Venezuela.
First-Quarter Earnings: Impressive!
Ford reported a 15% rise in profits to a total of $1.6 billion, a substantial proportion of which was earned through the North American operations. The region reported net income of $2.4 billion; it's highest in over a decade. As a result, the company's per share earnings improved from $0.35 in the first quarter of 2012 to $0.4, which beat the analysts' forecasts of $0.37.
Revenues also improved by 10% beating estimates substantially despite the slow performance in European markets. The increase in revenues can be traced back to the performance of Fusion and pickup trucks. The company also maintained its previous year's liquidity position. However, the operating margin decreased from 6.4% in the first quarter of 2012 to 5.2%. Similarly, Ford Credit sustained its commendable performance by reporting a pre-tax profit of $507 million, demonstrating an increase of $55 million.
A trend is developing in Ford's earnings announcements - we saw the highest pre-tax profit in the fourth quarter and now, the company has gone on to beat the analyst expectations. The company is developing a habit of giving a positive surprise to the market, which indicates that the core business is progressing well.
Industry and Market Dynamics
Ford is a major player in the North American market, and its major competitors are General Motors (GM), Toyota (TM) and Volkswagen (OTCPK:VLKAF). Ford faces competition from General Motors in shape of Chevrolet Silverado and GM Sierra - these two vehicles will be released later this year whereas Ford's new F-150 is expected to be released in the next year. Ford has managed to improve its market share in North America from 15.2% to 15.9%. A similar increase has been visible in China from 3.2% to 3.6%. Toyota has introduced more than 15 new vehicles; however, Ford maintains its standing in the automotive industry by very careful and strategic positioning of its products.
Valuation and Risks
The company is currently trading at a P/E of 9.38 as compared to the industry average of 13.02. Similarly, the company's P/S, P/C and P/FCF of 0.39, 6.41 and 18.79 remain substantially below the industry averages of 0.8, 8.35 and 37.69, respectively. In addition, the stock offers an attractive dividend yield of about 3%. However, this upside potential of the company remains subject to some risks, which are primarily macroeconomic in nature. Already, the situation in Europe has damaged the revenues of the company. The geographical diversification has played a very important role in curtailing this damage. However, the exposure of the company to the North American market is large primarily, and we are seeing an impressive recovery in these markets, which should provide the company with future growth. Ford also has a financial concern, which exposes it to macroeconomic shocks; again, these shocks are less likely to happen due to the recovery in the overall economic conditions.
Ford is making impressive progress, and over the last 12 months, we have seen the company reap benefits of structural changes and recovery in the North American markets. In addition, we are also seeing growth in the Asian markets, which are going to be the future growth drivers for the company. Fords' increased stake in China has opened the company to a massive market where it can establish itself as an important player.
At the moment, Ford is a growth company, in my opinion. The global economy is going to recover from the recession in the next two-three years, which is going to increase the per-capita income as well as spending. As the economic conditions get better, we are likely to see an increase in spending on vehicles, which will send the sector into the growth phase. Ford has built a great platform by increasing its operational efficiency, which will allow the company to capture the growth opportunity while managing the costs.