Will Ford Fail To Live Up To Its Expectations?

| About: Ford Motor (F)


Ford’s hasn’t lived up to its expectations in 2014.

The company has struggled in the U.S. due to bad weather. However, monthly sales in China are up 67% year-over-year.

Ford is sticking to its plan of spending $5 billion in R&D in China.

The Chinese automobile market has great potential and the increased R&D spending should benefit Ford in the long-run.

Ford is a great buy at present valuations.

It has been over three months since I last wrote an article on Ford (NYSE:F). Since then, Ford's shares have gone down marginally as the company has failed to meet the expectations of many analysts. 2013 was the best year in the automaker's history; however it hasn't been successful in sustaining its bullish run in 2014. The company has struggled due to bad weather in the U.S.A., but I still think it's a great buy.

The bad weather is just a temporary issue and sales should start to gather pace in the coming months. However, in the meantime, the company has taken a giant leap forward in the Chinese market. The growth in the Chinese market is as important as the growth in the U.S.A. as the country is the world's largest automotive market and is expected to remain one of the fastest growing markets in the coming years.

Ford manufactures cars in China in partnership with Chongqing Changan Automobile (OTC:CQCAF) and Jiangling Motors (OTC:JGLMY). The automaker released its official monthly statistics last week, affirming that it managed to sell 73,040 vehicles in the Chinese market in February. This marks an impressive increment of 67% from the corresponding month of 2013. This impressive up tick came on the back of 53% y-o-y sales jump in January, and 35% surge in December. The sales were supplemented by continued strong demand for its Ford Focus (up 13%), which was the best-selling nameplate in China in 2013, and Ford Mondeo.

Ford's sales in the first two months of the year jumped 59%, bringing the total to 167,506 cars and this should be enough for the company to meet its goal of doubling its market share from 3% to 6% in China by 2015.

Why Ford Will Continue Growing In China

As mentioned above, Ford commands a very small market share in China, thus it has a lot of room to grow. However, the automaker didn't realize the potential of the Chinese automobile market until 2012. In 2012, the company promised to spend about $5 billion to increase production capacity by 100% and intensify R&D efforts. The positive effects of this revolution were visible from the word go as Ford's sales in China grew 21% in 2012. A political dispute between China and Japan in 2012 also helped Ford, along with General Motors (NYSE:GM) and Volkswagen (OTCPK:VLKAF), to increase their market share in the country as the Japanese manufacturers had to cut their production by 50%. Then in 2013, Ford sold over 935,000 cars, marking a 50% improvement over 2012.

Ford claims that this plan is the company's biggest expansion endeavor ever and has no plans of stopping just yet. The Wall Street Journal reported that Ford is looking to expand its R&D facility in China in the coming years to increase its market share. In addition, the company plans to double its headcounts in the R&D center in Nanjing, a city in East China, to 2,000 by 2018. Also, the automaker claimed it will invest an extra $100 million in its research facility and aims to build a new 60 mile test track.

Other points from The Wall Street Journal's report include:

· John Lawler, chief executive of Ford Motor China, last month said he expects that Ford's sales growth in China this year would outpace the 7.5% to 8% gain he forecast for the broad Chinese auto industry. He predicted that Ford would sell more than one million vehicles in China this year.

· A new plant in the Eastern city of Hangzhou that cost $760 million and will have the capacity to build 250,000 vehicles annually will open next year. Ford expects that its Chinese production capacity around that time will reach 1.2 million passenger cars, double the level of 2012.

· Ford plans to expand the number of its manufacturing facilities in China to nine from four.

Unable to satisfy demand can prove to be a major headwind. For instance, dealers had to stop the bookings of Ford's EcoSport in India due to production constraints. As a result, Ford couldn't make the most of its opportunity in the Indian market. However, Ford has ensured that it doesn't run into a similar kind of problem in China. The company's efforts to step up its production capacity to 1.2 million vehicles will be enough meet the skyrocketing demand.

The production plants in Chongqing and Hangzhou, which are scheduled to open by the end of 2014, will produce 500,000 vehicles in total and should be enough to boost Ford's annual sales to 1.5 million in the coming years.

In addition, Ford is inspired to spend on R&D by the success of Ford Mondeo. The Mondeo is an effectively a modified version of America's Ford Fusion and has been highly successful in China. Hiring locals for R&D will also boost sales as they will know how to modify the upcoming cars as per the liking of Chinese people.

Wrapping Up

In my opinion, Ford is too good to not own. Investors should ignore the short-term woes as the company's prospects look bright. The excessive R&D spending may eat up Ford's earnings in China; however it will benefit the company in the long-run. China is the world's biggest automobile market, thus it's important for Ford to do whatever is required to gain as much market share as possible. In addition to the strong prospects, Ford is currently very cheap as it trades at 8.86 times trailing earnings and offers a sweet dividend of 3.2%. Considering the moves that Ford is making in the Chinese market, investors can expect stronger top and bottom line growth in the years to come.

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.