Should You Be Worried About Ford's European Production Halt?

Sep.20.13 | About: Ford Motor (F)

The short answer is : absolutely not. But first, some exposition.

Ford (NYSE:F) is leading the U.S. automaker comeback. Recently, I penned an article stating my case for being bullish on Ford - citing five major reasons; Ford had a great August, it just had its credit upgraded, its dividends are likely to increase, it's a technical buy, and it's a great turnaround story.

Ford has been a great investment vehicle since 2008, when it hit its lows in the midst of the financial crisis. Since its low in 2008, Ford is up over 600%. In the short term, it's also provided 69% returns for those that have invested in the company over the past 12 months.

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It was reported this morning, by Reuters, that Ford was going to be halting production for 13 days in Romania, due to a build up of inventory and lower demand for vehicles across the board in Europe:

The Romanian unit of U.S. carmaker Ford Motor Co will halt production for 13 days in October, following a planned one week stoppage this month, due mainly to weak demand on the European market, it said on Friday.

Ford, which took over struggling carmaker Automobile Craiova in 2008, began production of its B-Max model at the plant last year. It now roughly produces 370 cars a day and 1,000 engines.

Its main exports markets are Germany, Italy, Spain and France, with Britain being its main customer.

"We're confident these are temporary measures and that the situation will improve as European vehicle sales will start to slowly recover," said Ford Romania spokeswoman Ana Maria Timis.

"Depending on the market's evolution, we will also adjust our (production) volumes in November/December."

More than half of Ford Romania's employees, or about 2,500 people, will be impacted by the production halt, but will receive 80 percent of their wages during the stoppage.

Ford, which in July lifted its 2013 guidance to an unchanged pretax loss in Europe of about $1.8 billion from $2 billion, recently closed two ancillary plants in the UK and plans to shut its Genk assembly line in Belgium at the end of 2014.

After reading this as a headline across several news sites, it's likely that one would equate a halt like this to poor company performance, and tie that to a decision on whether or not to make an investment in the company. My argument and analysis of this situation is that the news should be almost downright ignored - for several reasons.

The first is that poor auto sales in Europe are par for the course right now. The countries that the Romania plant are responsible for - Italy, Spain, Germany - are in anything but auto industry booms. The British market, which echoes a bit more of the US economy (read: there isn't 25% unemployment like Spain and Italy) has been the main driving force in Europe. The Telegraph reported on September 17th:

Tuesday's data also confirmed a 10.9pc rise in new UK car sales in August, representing the 18th consecutive month of rises.

Earlier this month, the Society of Motor Manufacturers and Traders (NASDAQ:SMMT) said the industry had benefited from rising interest in new fuel efficient models.

Secondly, this is a trend that's effecting all of Europe, and it's looking like the worst is already over with. If this was a trend that was centralized to a large market of Fords, there could be room for major concern - but this a macro trend overseas, and one that appears to have hit a bottom. The New York Times recently reported that auto sales in Europe are likely to find a revival by 2015:

Harald Hendrikse, an analyst at Nomura International in London, said that taken together, the two months appeared to have been roughly flat from a year earlier.

"The good news is that there is probably no more deterioration," he said. "Clearly, from a low, low base, we are stabilizing. The bad news is that it's not getting any better, either."

The European auto market has been in retreat since the financial crisis, the downward progress halted at times only by the temporary stimulus of government cash-for-clunker programs, in which owners receive tax rebates in exchange for trading in older cars.

Unemployment is high in Europe - 12.1 percent in the 17-country euro zone generally, and more than 25 percent in Spain and Greece. And cars are seen as a luxury, rather than a necessity, by those consumers who have access to good public transportation.

"With no new jobs, with a declining population and with an aging population, demand for new cars naturally declines," Mr. Hendrikse said, noting that a similar phenomenon was occurring in Japan, where car demand has been shrinking for most of the last 25 years. In the United States, by contrast, car sales have been steadily exceeding last year's pace.

Mr. Hendrikse predicted that European sales would decline about 5 percent this year and remain essentially flat in 2014. For 2015, he predicted a modest 2 percent increase.

One quirk of the European slump has been that, among major markets, only British sales have held up this year. The British market grew by 10.9 percent in August from a year earlier. The German market, the largest in Europe, shrank by 5.5 percent, while France declined by 10.5 percent and Spain by 18.3 percent. Italian sales fell by 6.6 percent

What this means is that although this is effecting Ford, it's a macro based trend that's effecting all automakers overseas - not just Ford - and it's in no way going to give a leg up to Ford's overseas competition. The damage this deals to Ford will be nearly the same damage that every overseas automaker takes.

In addition, Ford has taken "common sense" steps overseas, closing two of it's ancillary plants in the UK and Belgium to help trim the company's losses in a tough automobile market. In July, Ford lifted it's guidance on Europe, lowering it's loss from $2 billion to $1.8 billion. So, as far as Ford is concerned, it's taken all steps necessary to, like Britain, "buck the trend" in Europe.

Finally, Ford has made a sensible decision here. Having a 13 day "off period", which manufacturers traditionally can use for periodic maintenance on machinery, plants, property and other equipment, is a much better option than simply closing the plant outright. Paying its employees (80% of normal pay) during this break is a heads up move to keep the workforce both happy and employed.

Risk here lies in the fact that the entire European auto market (sans Britain) is largely tied to the European economy, which is like trying to balance an elephant on the head of a pin. If the European economy continues to deteriorate, it's likely the auto industry will as well - leading subsequent shutdowns to not be as "temporary".

However, in the midst of data showing the auto market overseas has likely bottomed out, and the hope of the European economy not being able to get much worse, I'm reaffirming my bullish sentiment on Ford - a company that simply seems to be doing the "right thing", as of late. For more of my bullish argument, view my previous article on Ford, published earlier this week.

As always, best of luck to all investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.