Why Ford Is A Solid Investment

May.22.14 | About: Ford Motor (F)


Ford saw a big decline in profit in the first quarter, but investors shouldn't be concerned.

Ford has lined up a number of vehicles going forward that should help it gain more market share.

Ford's attractive valuation and earnings growth prospects make it a solid long-term buy.

Ford (NYSE:F) has failed to replicate the success that it saw in 2013 so far this year. After gaining an impressive 20% in 2013, Ford shares are up just 3% so far this year. Moreover, the company's first-quarter results weren't great either. Ford failed to meet analysts' estimates and reported a considerable drop in its earnings.

Although management was anticipating a decline in profits, it surely wasn't looking at a 39% year-over-year drop in net income. Ford's profit fell on account of higher warranty costs and losses due to currency devaluation in South America. Harsh weather conditions added to its problems by leading to increased costs.

Long run prospects are strong

However, investors should focus on the long run. Although the first quarter was a bit disappointing for Ford, management is confident about its prospects going forward. Ford's aggressive moves in emerging markets have yielded good results so far as it acquired market share in the Asia-Pacific region and achieved record share in China. Along with North America, the Middle East and Africa were also profitable. Ford Credit delivered a solid performance once again.

Ford is also working to turn around its European operations. Driven by its strategies, it managed to reduce its losses considerably in the European market, cutting the loss by more than half from a year ago and by nearly two-thirds from the fourth quarter of 2013. Moreover, the European economy is emerging from recession and GDP growth of 1% is expected in 2014. In addition, the European Central Bank did not change its interest rates and indicated that it will keep the rates steady going forward. This is indeed a good sign for the company, as lower interest rates will encourage consumers to buy more vehicles.

Citing a positive outlook, Ford expects pre-tax profit for the whole year to be in the range of $7 billion to $8 billion. This is lower than the $8.6 billion profit that Ford had posted in 2013. However, there are some key reasons why Ford expects to take a hit to the bottom line.

Expanding aggressively

The company is preparing to launch a record number of new vehicles this year. Ford will launch around 25 new vehicles in Europe in the next five years. In addition, identical expansion plans have been lined up for China, the Middle East, and Africa. All in all, the company is on track with 23 global product launches in 2014. These new launches will strengthen Ford's position in different markets across the world going forward, even though they will hurt its bottom line in the short run.

Ford is looking to make the most of the emerging markets and so, it has expanded the production of its successful EcoSport to Thailand, making it the fourth plant globally to build the all-new urban SUV. It has also invested around $168 million in its Ohio plant for the production of 2016 F-650 and F-750 medium-duty trucks, which will commence operation in 2015. Also, it plans to build a 2.7-liter EcoBoost engine at its Lima Engine Plant in Ohio to increase production of Super Duty and Kentucky Truck. Ford has invested $500 million for these moves.

Ford has also made considerable efforts to improve its research and development. It has entered into partnerships with MIT and Stanford University, along with the expansion of its Research and Engineering Center in Nanjing, China. Hence, the company is looking to make its vehicles better and more fuel efficient.

Ford is a leading player in pick-up trucks in the U.S., and the company is trying to maintain its advantage going forward through innovation.

According to USA Today --

Ford is making the radical shift to lighter-weight aluminum for the F-150 body and cargo box, and investing in high-strength steel for the frame, which is lighter than regular steel. The changes will cut some 700 pounds from the full-size F-150.

Cutting weight improves fuel economy and performance and allows the use of lighter components elsewhere. The truck's chief engineer, Pete Reyes, insists the aluminum truck will carry more, tow more, and be more resistant to dents in the bed and on body panels than the steel F-150 Ford currently sells.

'This is a gutsy move, as Ford will either leapfrog ahead of the competition on light-weighting vehicles to improve fuel economy, or they could mess up what is arguably one of their most profitable products,' says Christian Mayes, analyst at Edward Jones Equity Research.

So, quite clearly, Ford is making heavy investments in its business for the future. As such, even though its profits are expected to decline in the short term, investors should focus on the long-term prospects of Ford as it can get better going forward.

A minor concern

However, South America still remains a concern for the automaker as it had incurred heavy losses. The devaluation of currency in Venezuela has also added to Ford's troubles. The Brazilian economy is slowing down due to the high interest rates imposed to control inflation. According to management:

The quarter was impacted adversely by several significant factors that are not representative of the underlying run rate of our business."

Fundamentals and final words

Analysts are also quite upbeat regarding Ford's prospects. The company's earnings are expected to grow at an annual rate of 12.6% over the next five years. This would be a marked improvement from an annual decline of 6.3% over the last five years. Also, Ford currently has a trailing P/E of 9.81, and the forward P/E seems promising at 8.25.

Although the first-quarter results were slightly disappointing, management is confident that these short-term pains will lead to better times in the long run. Ford has a strong pipeline of vehicles going forward, and it is seeing strong growth in the majority of its markets. As such, investors shouldn't be discouraged by Ford's performance so far in 2014 as the company can pick up momentum going forward.

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.