- The launch of new models will increase the sales of the company.
- The focus on managing costs will support the company's efforts to achieve improved margins.
- The financial segment of the company has been able to manage its assets well.
The American automakers have performed well over the last year - Ford Motor Company (NYSE:F) gained about 17% while General Motors (NYSE:GM) went up by over 40%. The companies have made considerable changes to their business models as well as the production systems to compete with Toyota Motors (NYSE:TM) and other foreign brands. As a result, the overall shape of these companies has improved and the changes have set these companies up for sustained growth over the next decade. The changes have allowed Ford and GM to manufacture vehicles according to the changing trends in consumer preferences.
Ford is going to shake up its product mix over the next two years. This includes both launching new models of the existing brands and also launching new brands to meet the increasing demand of vehicles in China. Furthermore, the company is getting better in its financial services segment with better rates of recovery in accounts receivable. We believe that these factors will add to better profitability and the stock will again perform well over the next few months.
A Shake up of the Product Mix
Ford launched 11 models during the last year, and it was one of the major factors in improving the top-line as well as the bottom-line of the company. During the current year, Ford will launch 23 models - the launch of new models usually impacts the sales in the months before the expected launch. We have previously mentioned the decline in sales during the colder months due to the extremely cold weather; we can also expect a slight slowdown before the launch of new models as the buyers usually delay the decision to buy a new vehicle until the new model is launched. We should see an increase in revenues from both segments as the company launches its new models.
As mentioned in our previous article, Ford did not do well in the consumer satisfaction survey - one of the factors mentioned in the survey was the poor performance of the vehicle entertainment system. Ford was previously using Microsoft based Sync as its car infotainment systems, which has been giving trouble to the consumers. In some cases, the faulty infotainment system can impact one's driving ability as constant tapping of the infotainment system will divide the attention and potentially cause an accident.
Fortunately, the new models being launched are based on QNX, a BlackBerry (NASDAQ:BBRY) owned software. Its performance has been tested by consumers on Audi and BMW and they remain satisfied. It is expected that this factor will be eliminated by shifting the infotainment system to QNX.
Ford 150, one of the best-selling trucks in North America, has undergone a few changes. The new model weighs seven hundred pounds less than the older one. The reduction in the weight should allow the truck to have better fuel efficiency. The reduced weight of the new F-150 will decrease its fuel cost and allow it to carry more weight.
In addition to the manufacturing, Ford offers leasing services on its vehicles. One of the biggest risks in the leasing or loaning business is the inability of the borrower to pay. If the write-offs or bad debts are high for the business, this means either the borrowers are having trouble paying their dues or the company has a weak accounts receivable system. The table below shows the provisions and the written-off receivables during the last five years.
Source: SEC Filings
It is clear from the table that the performance of the segment is gradually improving. Both the values are decreasing and currently stand substantially below the five years ago levels. This has resulted from the new efforts focused on due diligence adopted by the company. Extensive investigation is now done into the credit history, employment data and various other factors. At the moment, these numbers are negligible and the better management of the system should allow the company to keep these numbers low.
The launch of the new models should have a quick impact on the sales. The company is starting to see some traction in the Chinese market after a slow start. Ford is focusing on improving margins and profitability, and the plant in China should allow the company to achieve this goal. Furthermore, the company is focusing on developing models that can be sold all over the globe without major changes - this should further allow the company to manage its costs. The growing demand for Ford's vehicles in Asia and the efforts to manage costs should have a dual impact on the profitability of the company over the next few quarters.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.