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Summary

  • Strong growth from the emerging markets as well as recovering European markets will allow the company to enhance its earnings.
  • Production plants in China and Brazil will help Ford meet its growing demand in these regions.
  • Ford's stock price will show sustained upward trend on the back of solid growth from the emerging markets and recovering European and North American markets.

The U.S. auto industry continues to show strong growth with automobile sales reaching 15 million units in 2013, the industry marked the best year for automakers since 2007. Ford (NYSE:F) has been able to retain its market share of 15.5% in the domestic market, and the company will likely increase its market share with its new model launches. However, Ford's increasing market share in the European and Asian markets is hugely encouraging, as the Asian markets are growing at an exceptional rate.

European Region is now Stabilizing

Over the last few years, the European market has proved to be a difficult region for automakers due to poor economic conditions of the region. Ford lost around $3.4 billion in Europe over the last two years. However, according to the first quarter earnings release, results for Europe showed progress towards profitability, marking the 11th consecutive month of year-over-year sales improvement. Further, Ford completed sales of around 100,000 vehicles last month in its 20 main European markets, showing an improvement of around 6.6% compared to the last year. The company also managed to outpace its competitors over the period which posted slower growth rates in the region. The first-quarter performance of Ford boosted its market share to approximately 8% in Europe.

This increase in sales comes from the fresh product line of the company sold mainly in Western Europe. The Fiesta remained the company's bestselling car in the region with total registrations accumulated up to 29,000 since 2010. Ford's commercial vehicles also continued to improve its sales and posted the best ever sales at the year start since its introduction in Europe in 1999. The Ford Ranger, international pickup truck of the year, recorded 1,700 unit sales and increased its market share to 10.2% in the European region. This is indeed a good sign for the company, as sales are getting stronger along with increasing market share in the European region.

Growth in Emerging Markets

Ford has increased its pace of expansion in the emerging markets over the last few years. The company's investment in Chinese market in 2009 is paying off, as it now has a market share of 4.1%, recording an average annual increase of over 13% in the last five years. Moreover, Ford plans to set up new manufacturing facilities in China and Brazil in 2014. Ford's plant in Hangzhou, China, is expected to be operational by 2015 with the capacity to add another 250,000 vehicles to the company's current production capacity. The increased supply will help meet demand for Ford vehicles in China which is expected to grow to 1.2 million units next year. The existing manufacturing facility in eastern China, Nanjing, has also reported major improvements in research and development. Hence, the company is looking forward to making its vehicles more fuel efficient with better technological advancements. Due to this, Ford's sales are approaching 100,000 vehicles per month, showing an increase of around 29% year-over-year in 2014. The Mondeo remained the bestselling car in the region, increasing its sales by five folds last month.

Possible Negatives

Recently, Ford recalled nearly 700,000 vehicles to fix two safety problems. The company is recalling the latest models of its Escape and C-Max products, with a software malfunction issue that can prevent the deployment of side curtain airbags during a rollover incident. Ford's biggest competitor, General Motors (NYSE:GM), also faced a similar situation and incurred a heavy loss of almost $1.3 billion in the first quarter. However, unlike GM, Ford's recall does not pose any major financial threat to the company. Moreover, the company also set aside $400 million as warranty reserves to hedge against any such losses in the future.

The first-quarter earnings failed to meet the estimates and showed a drop in earnings year-over-year. However, the long term prospects are quite strong for the company. Over the last year, Ford vehicle sales in the North American region rose 11% year-over-year; however, the company is aggressively pursuing the emerging markets and recorded a 30% increase in sales for the Asia-Pacific and African regions in the last year. Moreover, the compound annual growth rate stood over 23% for the Asia-Pacific region over the last five years.

Conclusion

The growth for the auto manufacturers remains strong in the emerging markets with these economies showing stronger growth than the developed world. Ford is well positioned to exploit this growth opportunity over the next two-three years with its plants in China and Brazil. We expect Ford to post strong gains over the next two-three years on the back of solid revenues and earnings growth from the emerging markets, as well as its recovering operations in Europe and North America.

Source: Ford Is Well Positioned To Grow