Ford Will Continue To Grow

Aug. 3.14 | About: Ford Motor (F)


China and Asia Pacific will be a key market for the future growth and sales volume in these markets will remain strong over the next few quarters.

European and North American markets will continue to show slow growth in the short-medium term and the best strategy here will be to increase operational efficiency.

Chinese market continues to grow at a break neck speed and even the mature players in this market are showing impressive growth figures.

Ford (NYSE:F) had a successful second quarter which lead to significant improvements in profit as compared to the same quarter last year. In addition, it gave a bright picture for further improvement in the second half of this year. We have been optimistic about the prospects of the company based on its future growth prospects in the Asian as well as recovering European markets. In our previous articles, we have discussed in detail the company's interests in China, Europe and North America. We have also looked into how beneficial the new Ford 150 series may turn out to be due to its weight reductions, increased efficiency and more strength.

In this article, we will see how much growth came from these regions for Ford and how much room is there for future growth. In our articles, we are mainly focusing on the business segments of the company as we believe the growth in these areas will translate into the rise in the stock price - in the long-term, we believe Ford stock will have an upward slopping stock price trend and we are not worried about short-term price movements.

A Glance at the Earnings

In the second quarter of 2014, Ford posted its 20th consecutive quarterly profit. Also, its pretax profit was the highest since the same period in 2011. Excluding the special items, the company's pretax profit was enhanced by $44 million to make the total of $2.6 billion. However, due to increased profits, it may come as a surprise that its net revenues actually fell instead of rising. This was due to a decrease in wholesale vehicle volumes by 1.01% i.e. 17,000 units - total number for the quarter stood at 1.7 million units. However, in the first six months, the wholesale unit volumes still show a 2% increase due to a strong first quarter sales. Let's now look at the regions and see how much they are likely to contribute in the future growth.

North America

As we have said before, North American market is still recovering and it will continue to show slow growth in the short-medium term. The results for the second quarter prove our theory as the North American wholesale volumes decreased by 5% and revenues fell by about 2.75%.

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Source: Ford Second Quarter Earnings Presentation

It is clear that the domestic market continues to show poor results in terms of volumes and revenues for the company. However, at the same time, the company has been able to improve its margins and pre-tax profits. This shows that the strategy to counter the falling volumes and revenues is to be more efficient in operations, which is clearly paying-off. In the second quarter, Ford's market share was 15.3% which represents a 1.2% drop on year-over-year basis. This decrease in market share is explained by reduced production of Ford F-series, a lower market share of Ford's Focus and Edge in sales mix and planned decline in daily rental sales.

Ford has temporarily shut down many of its factories in order to adjust them for the new trucks of F-series. The company is taking strong measures to prepare the market for the upcoming F-series models. It has pushed out extra inventories of the previous models from its dealerships by offering them incentives to clear out everything. Most customers would prefer to wait for the new F-series to come before they buy their new trucks. This would not be good for the previous inventories. With the incentives offered, this problem will be eliminated. As a result of these measures, the next two quarters are going to be exciting for the company as the sales will jump in the domestic market and Ford will be able to recapture some of the lost market share - F-series will have a huge impact on sales going forward.

China and Asia Pacific

China and Asia Pacific is the fastest growing region for the company and we believe this region will be the largest growth driver for Ford. The company has been recording growth at an extremely impressive rate and it continues to capture substantial market share in the Chinese market.

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Source: Ford Second Quarter Earnings Presentation

In china, the wholesale volumes increased 26% sequentially while the revenues for Asia-pacific increased 9%, after excluding the joint ventures in China. The company also increased its market share in China by 0.3%. The models behind this success are, Mondeo, Kuga, and Eco sports - the operating margin in this segment improved by 0.6% to 5.5%. Ford's pre-tax profit from this region also saw a strong increase of 22.3% on year-over-year basis and currently stands at $159 million. Improved volumes, higher royalties form joint ventures and a favorable sales mix, are the factors attributable to this growth.

Going forward, China and Asia Pacific will be a key market for the company. Manufacturers sold over 22 million vehicles in the Chinese market alone during the last year, and Ford is growing its market at an impressive rate in this rapidly growing market. Recently, Toyota (NYSE:TM) announced its global sales which put it at the top spot - however, the interesting thing to notice was the company's growth in China, which stood at 12%. It should be kept in mind that Toyota is a mature player in the Chinese market and has been operating there for a number of years. However, growth figures for even the mature players remain in the double figures, which show the growth potential of the market. Ford is getting very good reception in the Chinese market and we believe the growth from this market will remain strong for Ford in the short-medium term.


As stated at the start, Europe remains one of the slower regions for the company as it is still recovering from the economic turmoil. In this segment, the company's market share decreased by 0.2% to 7.9% because of a decline in rentals and fleets. In commercial vehicle segment, the company performed well and its market share improved to 10.65% this quarter. However, Ford lost 0.1% of market share in the passenger car segment. Ford is focusing its strength to increase its market share specifically in fleet segment and collectively achieving an optimal sales mix from the European segment.

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Source: Ford Second Quarter Earnings Presentation

Wholesale volumes were almost flat year-over-year, but the revenues went up considerably - at the same time, operating margin showed a solid swing and went from negative 4.2% to 0.2% in the second quarter. The pre-tax profit also showed the same trend and went from $306 million in operating losses to $14 million in pre-tax operating profit. Despite slow growth from the region, the company has been able to improve its operating results, which is very positive and it is in line with our theory that the strategy in the mature European and North American markets will be to enhance operational efficiency.

Ford is also looking to be a little more aggressive in introducing new models in this segment over the next five years. It previously reported that it will launch 15 models in this segment in the next five years. However, the company has now increased this number to 25. Ford is also launching the new mustang in this region. With these measures, we believe that the company will be able to enhance its operating profits. Ford expects to achieve breakeven in this segment by the next year.


We remain confident about the growth prospects of the company, and believe the growth story is playing out according to our expectations. We are expecting further expansion in the Asian markets which will be the key growth drivers for the company over the next few quarters. At the same time, we believe European and North American markets will start to gather pace and these regions will also start to contribute more. Due to the solid progress in the fundamentals of the company over the next few quarters; we believe Ford's stock price will appreciate considerably.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.