Shares of Ford (NYSE:F) are setting fresh highs for 2013 after the release of second quarter results. The valuation of its North American activities alone, which generated 90% of second quarter total operating income, could support the current valuation.
Yet it is the strong incremental profit improvements in South America, Europe and Asia-Pacific which start to kick in and make meaningful contributions. This gives us a look into the possibilities for the coming years.
Even after the strong returns this year, I continue to see upside potential for the shares. As its European activities are on track to break even in two years' time, and profit improvements in South America and Asia continue to materialize, net profits of $10 billion per annum in 2015 are possible. This would value operating assets at merely 6 times annual earnings.
Second Quarter Results
Ford generated second quarter revenues of $38.1 billion, up 14.4% on the year before. Automotive revenues came in at $36.0 billion, comfortably beating consensus estimates which stood at $35.1 billion.
Revenues were driven by a 16% jump in wholesale volumes. Ford shipped some 1.68 million cars during the quarter, in line with its current production rate. With automotive revenues coming in at $36.0 billion, the average selling price per car came in at $21,400.
Pre-tax profits rose towards $2.56 billion, coming in at $0.45 per share. To put this into perspective, analysts' consensus estimates stood at $0.37 per share, and last year Ford earned pre-tax profits of $0.30 per share. Operating margins rose by 150 basis points across the board to 6.4% of total revenues.
Net income rose by merely 18.5% to $1.23 billion. GAAP earnings per share came in at $0.30, up four cents on the year before. Net earnings growth was slowed down on the back of higher extra-ordinary charges, including adverse currency movements in South America and accelerated depreciation charges in Europe.
CEO Alan Mulally commented on the developments during the quarter, "Our strong second quarter with improved results in every region around the world is another proof point that our One Ford plan is continuing to deliver and is building momentum. We remains absolutely committed to our plan of serving customers in all markets with a full family of vehicles offering the very best quality, fuel efficiency, safety, smart design and value."
Looking Across The Globe
Ford's overall results are driven by a strong performance of its North American operations. Revenues rose by 13.7% in this area to $22.4 billion, while operating income rose by 15.9% to $2.33 billion. As such, the unit generates the vast majority of company-wide profits. The company squeezed out another 20 basis point margin improvement, as operating margins rose to 10.4%.
South America saw a meaningful recovery. Total revenues rose by 30% towards $3.0 billion. More important, the unit generated pre-tax profits of $151 million, or 5.0% of its total revenues. Last year, the business reported break-even results as the improvements are attributed to higher sales and favorable dealer stock levels.
The European operations remain a troubled child for Ford. Revenues were actually up by 7.0%, to $7.6 billion. This is quite a decent performance in light of the troubled state of the European car market. Operating losses narrowed slightly to $348 million, coming in at 4.6% of total sales. Accelerated depreciation charges, on facilities that the company wishes to close, hurt earnings. This masked the real progress which the firm has made in the area.
The Asia-Pacific region saw revenues come in around $3.0 billion, up 30% on the comparable period before. Strong sales in China, where Ford holds a 4.3% market share, boosted revenue growth. At the same time, operating earnings came in at $177 million, or 5.8% of total sales. Last year, the unit was still reporting operating losses.
Ford ended the quarter with $25.7 billion in cash, equivalents and short term investments. The company operates with $15.8 billion in total debt, for a net cash position of $9.9 billion.
Revenues for the first six months of the year came in at $73.9 billion, up 12.5% on the year before. Net earnings rose by some 16.8% towards $2.84 billion. At this rate annual revenues could come in just below the $150 billion mark. Net earnings could come in around $6-$7 billion.
Trading around $17.50 per share, the market values Ford at roughly $69 billion. Factoring in the net cash position of the automotive activities, the firm's operating assets are valued around $59 billion. This excludes the liabilities from the financing company.
As such operating assets are valued around 0.4 times annual revenues and 9 times annual earnings.
Ford currently pays a quarterly dividend of $0.10 per share, for an annual dividend yield of 2.3%.
Some Historical Perspective
Ford and its CEO Alan Mulally have received many credits as he steered the firm away from bankruptcy during the tough years amidst the financial crisis. Ford raised cash early and embarked on the right strategic track.
Shares are still trading a long way from their all time highs, which was set around $37 back in 1999. Since then, the company has seen a deteriorating operating performance. This forced the company to skip its quarterly dividend in 2006, putting shares under even more pressure. During the financial crisis of 2008-2009 shares hit absolute lows below $2 per share as a bankruptcy was a quite realistic possibility.
Yet, shares of Ford saw a strong comeback. They were trading at highs of around $18 at the start of 2011. Shares are currently trading at these levels again after witnessing year to date returns of 35%.
Between 2009 and 2012, Ford has increased its annual revenues by a cumulative 15% to $134 billion. The company has been consistently profitable over the past four years, posting a $5.7 billion profit over the past year.
Ford saw a really solid performance across the globe over the past quarter, prompting the company to raise its full year forecast. Instead of matching last year's $8 billion operating profits, the company now expects to achieve full year operating earnings which could possibly exceed that number.
Ford is eager to point out that this is just the start. Only North America's operations are truly thriving. South America and Asia are only just starting to pick up, while the company is making progress in containing its European losses. Head of European Operations Stephen Odell said the company is still aiming to break even in 2015 in Europe as the industry is showing signs of stability.
Impressive is the 69% increase in Focus deliveries in China, where the company is catching up on General Motors (NYSE:GM) and Volkswagen. Despite the troubles of the global middle-class, Ford is boosting its market share in a globally challenged car market.
In fact, its US market share rose another 80 basis points to 16.5%. Ford will hire another 3,000 workers in Michigan this year to meet demand. Its European market share was on the increase as well, while the company saw its market share in Asia rise by a full percent point to 3.6%.
Back in October of 2012, I last took a look at the prospects for Ford. With shares trading around $10 at the time, I concluded that shares offered great appeal, trading at low earnings multiples. Shares have bounced upwards by some 70% since. Continued improvements in operating performance and dividend hikes have boosted their appeal.
Given the massive progress which the company has made across the globe, and the still modest valuation multiples, I would not be surprised to see shares take on the $20 barrier in the coming weeks or months.