The global demand for cars is rising. The increasing standard of living and demand for fuel-efficient cars is boosting prospects for car manufacturers. During this time period, Ford (NYSE:F) has maintained a rather strong stance. We will examine what value the company presents for investors and how it can be reaped.
The stock price is a function of earnings which is directly affected by macroeconomic factors and the growth in the top line of the company. Before investing, investors look closely at certain factors that can affect the company's performance. I believe the most critical factor is the company's ability to generate strong cash flows and earnings in the future or in other words growth in the bottom line and the company's cash flows. Therefore, I have conducted a detailed analysis of the company's future prospects to help the investors in the decision-making process. Before analyzing the company's future prospects, let us conduct a comparative analysis of the company and try to determine where the company stands right now in the industry.
Ford's performance was not up to the mark compared to industry averages in most aspects. As shown in the following table, the company's revenue grew with a CAGR of only 4.9 percent compared to the industry CAGR of 18.3 percent over the last three years. However, growth in net income is quite staggering at 27.8 percent. The company's operating margins are higher than the industry average of 0.9 percent. Although the company's operating margin is higher than that of the industry, the company's net margin is lower than that of industry average because of higher financing costs. Although, the company's return on equity is approximately 2.5 times that of the industry it was primarily attributed to higher financial leverage which also indicates that the company has more financial risk than that of other players in the industry.
Now, let us analyze the impact of the industry outlook on the performance of the company.
The recession of 2008-09 significantly affected the automobile manufacturing industry. The entire industry was not well-prepared for such an economic downturn. In order to survive in such an economic downturn companies were focusing on closing plants, reducing employment and cutting research and development expenditures. However, the industry now has a decent outlook.
Automobile manufacturers are directly affected by personal consumption expenditures. The following graph shows that the real personal consumption expenditures are rising in the post-recession period.
The personal consumption expenditure on motor vehicles and parts is expected to rise to $476.9 billion of chained 2005 dollars which reflects a 3.7 percent annual increase in the second decade of this century. Therefore I believe the slump that the automobile industry had fallen into has ended and automobile manufacturers should expect to see decent growth over the next several years. Expenditure on motor vehicles and parts are expected to rise from 3.58 percent to 3.95 percent of total personal consumption expenditures during 2010 to 2020. The following table further explains the distribution of personal consumption expenditures over the next several years among different categories.
Why Investors Should Buy Stocks in Ford
The industry outlook is quite decent but here the question arises: why should investors invest in Ford?
There are a couple of factors that can help Ford to bolster earnings. Ford is already focusing on small and fuel-efficient vehicles. I believe that Ford's EcoBoost will help the company to boost earnings as the company claims that the EcoBoost results in 20 percent greater fuel efficiency and 15 percent fewer CO2 emissions. Ford has increased its production of EcoBoost enhanced vehicles as a result of increasing global demand.
Ford now produces more than 100,000 EcoBoost engines every month. The company has a target of 1.2 million EcoBoost engines this year which is 60 percent higher than the fiscal 2012 level. Due to fuel efficiency and environmentally friendly features I believe that Ford's EcoBoost engines will burgeon the company's profitability and cash flows in the near term. Ford is also making an investment of $200 million to build 2.0 liter EcoBoost engines in the United States which will further bolster the profit margins of the company in the years to come.
According to a report, the electric Ford Focus is the second most fuel efficient car. Therefore, I believe that the company's fuel efficient models will help the company to bolster its margins. Moreover, the Ford F-series pickup remained one of the most respected commercial trucks available. Thus I believe that the F-series will also help the company to increase its margins in the near term.
US & China Market Share
During the third quarter of the current fiscal year, Ford reported sales from China separately from the Asia Pacific region for the first time. Ford is a newcomer in the Chinese market. Ford's share was approximately 4 percent which is higher than last year's 3.2 percent in the first nine months of the current fiscal year. Moreover, the company will also continue to expand in the Chinese market.
Ford's share in the US market also grew to 15.8 percent which is higher than the full year share of 15.2 percent of fiscal year 2012. The company's sales grew with 7.4 percent this year relative to fiscal 2012 level.In my opinion decent growth in sales is expected to continue in both the US and Chinese markets because of Ford's EcoBoost engines.
Although the company's performance was not up to the mark compared to the industry the industry outlook and the company's future prospects are quite decent. I believe that the EcoBoost engines will lead the company's profit margin in the future. Due to fuel efficiency, I believe that the company will be able to further increase its market share in the US market. Moreover, the company only has a 4 percent share in the Chinese market so there is ample room for Ford to increase its market share in the Chinese market. The company's stock price improved this year by about 30 percent; however, I believe that there is still upside potential. Therefore, I would recommend that investors buy the stock.
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.