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Summary

  • Ford's Europe segment is gaining pace.
  • Shutting down inefficient assembly plants will reduce losses.
  • Cost cutting bodes well for Ford's plan to return to profitability in Europe by 2015.
  • New models will maintain momentum.

Earlier this month, I wrote an article on Ford (NYSE:F) highlighting the importance of its initiatives in the Chinese automobile industry. Ford has grown considerably in China and is now on track to meet its goal of doubling its market share from 3% to 6%. However, investors tend to focus more on its North American segment, which accounts for the majority of its earnings, and ignore the company's efforts in other segments. While it's true that the U.S.A. segment is a very important market, I believe other markets, like Europe and China, will contribute more to the company's growth. Since I have already discussed the China market in my previous article, I will be focusing on the European segment now.

More Positives In February

February was a good month for Ford. The company released its official monthly stats for Europe last week, affirming a year-over-year sales growth of 11.6%. Deliveries jumped from 74,000 to 80,800 and were primarily driven by models like Kuga SUV and Fiesta. Also, Ford's total vehicle market share in the region jumped three basis points to 7.5%.

While the growth wasn't as high as in the Chinese market, it's equally impressive as the company outpaced the industry average of 8%. This marks Ford's ninth straight month of year-over-year sales increase in Europe, which has seen its fair share of troubles since the financial recession in 2008 and 2009.

Europe Auto Industry Revival

After six years of trouble, Europe's battered car market is set to grow in 2014. In 2013, annual car sales in Europe were down 1.3% to 12.3 million units, which is the lowest figure since 1995; however, it is estimated to grow 2% in 2014. Low sales and retail pricing pressure have troubled many carmakers; however, with the economic conditions showing a moderate improvement in most European countries by the end of 2013, it's highly likely that sales will move up in 2014.

As per Alix Partners, 58 of the 100 largest auto-assembly plants in Europe were running at 75% efficiency in 2013, up from 29 plants in 2012. This further deteriorated the conditions of the automakers. John Hoffecker, a managing director at Alix Partners, said:

If you're running your plants at 90% of capacity, you're coining money. But if you're in the 70s or 60s, then you're just losing more money than you know what to do with.

Ford, along with other car makers like Peugeot and General Motors (NYSE:GM), is shutting down numerous plants all across Europe and cutting back the workforce to tackle the lack of productivity and dipping sales. Ford has closed two production sites in the U.K. and will close a major assembly plant in Belgium in 2015, eliminating some 6,200 jobs in total. This will reduce Ford's production by 350,000 vehicles and will increase the efficiency of other plants. Ford accounts for nearly 18% of Europe's total excess plant capacity, so it's certain that increasing efficiencies of the existing plants will put Ford right on track to meet its goal of returning to profitability in Europe by 2015. Ford of Europe CEO, Stephen Odell said:

European restructuring costs will wipe $400 million off Ford's 2013 profit but eventually pay back to the tune of $450-500 million in annual savings.

More Cost Cutting

Ford recently confirmed that it will end its 22 year partnership with European soccer's governing body UEFA after the end of this season's competition. Ford currently runs a TV ad, which is estimated to be viewed by more than 300 million people across 200 countries, to promote the Mustang brand.

Analysts claim UEFA's sponsorship packages cost above £45 million, or $74.5 million, annually. As per reports, Ford has been replaced by Nissan (OTCPK:NSANF) because it offered a higher fee before Ford started re-negotiating for the next cycle, and ultimately chose not to match it. Stephen Odell, president of Ford Europe, Middle East and Africa, said:

With the arrival of the Ford Mustang in Europe, we are finishing our long-standing sponsorship of the Champions League on a high note. While both Ford and UEFA have benefited from our partnership, now is the right time for Ford to move in a new direction as we accelerate new product launches in Europe, with more than 25 new vehicles coming over the next five years.

This termination, along with the closure of assembly plants, should reduce Ford's annual losses in Europe by over $550 million.

New Models Will Sustain Momentum

The company has escalated its efforts to gain market share in the European market and will be launching 25 new models in the next five years. Ford unveiled the new Ford Focus at the end of February for the Euro-region. The Ford Focus has massive potential as it was the best-selling nameplate in China in 2013. However, I think the Ford EcoSport, which is due to be launched in 2014, could be a game changer for the Blue Oval. Since the economy hasn't fully recovered yet, people will be looking to buy cheaper cars and the EcoSport fits the bill perfectly.

Ford launched the EcoSport in India in 2013 and it turned out to be the highest selling SUV in the country, dethroning rival Renault Duster. Superior looks and a better interior design allowed EcoSport to surpass the Duster's sales within three months of its launch. In fact, the demand was so high that Ford is struggling to satisfy it. The mini-SUV car segment in Europe has been consistent, and with the economy still struggling, I think the EcoSport will be a stellar performer.

Conclusion

With the cost-cutting initiatives and impending launch of new models, I think Ford is on the right track to return to profitability in Europe by 2015. The company has also laid out impressive plans to gain market share in the emerging markets. In addition to the strong prospects, Ford is currently very cheap, as it trades at 8.79 times trailing earnings and offers a sweet dividend of 3.2%. Considering the moves that Ford is making in the Asian and European market, investors can expect stronger top and bottom line growth in the years to come.

Source: This Market Will Drive Ford Higher