Ford Shareholders Need To Look Overseas For The Future

Aug. 4.14 | About: Ford Motor (F)

Summary

North America has been the major source of Ford's profit over the years.

Its foreign operations have been gaining some traction and have great potential.

The ONE Ford Plan will prove to be a key for success in foreign markets in the future.

Ford has small but growing market share in most of its regions, providing an opportunity for massive growth.

In its recently reported quarter Ford (NYSE:F) generated $37.4 billion in revenue, with $21.2 billion of that coming from sales in North America. Ford had a market share of 15.3% in the U.S. While the expected increase in demand from U.S. consumers had gained even more momentum following a strong July, foreign markets will be the key growth driver for Ford in the long term. Ford had $16.2 billion of its revenue for the quarter come from outside North America, with much more room to run. Ford breaks down its operating regions outside of North America into four segments: South America, Europe, Middle East and Africa, and Asia Pacific. Each one tells a different story but has potential to grow vastly and add even further to Ford's top and bottom line.

South America

It's no secret the major economies in South America have been struggling of late, harming many industries with the auto industry being no exception. According to CEO Mark Fields on the Q2 Earnings Call, the region's SAAR of 5.3 million units represents a fall of 13.1% from last year. Fields went on to mention that despite experiencing favorable pricing in South America, weaker currencies, high inflation and lower volume resulted in a pretax loss of $295 million for the quarter. There also was a change in product offerings which weighed on results. F's Ka model was changed to a smaller vehicle and the Fiesta Classic was removed entirely from dealerships as the company implements its ONE Ford mission. A major part of the ONE Ford initiative is new product rollouts and different models that would be more appealing to consumers in different regions of the world. The tailored offerings in each segment are expected to propel sales across the globe for Ford. With the Blue Oval only commanding 8.8% of the market share in South America, there is a lot of room for improvement. F guided that market share will increase for the rest of the year.

The other potential future tailwind for Ford in South America is the state of the economy. While few are prospering from the current economic environment in the region, it does provide an opportunity to profit in a few years. Similarly to the U.S. economy five years ago, most of the continent is in economic turmoil. The U.S. auto market certainly rebounded and will likely continue to grow in the following months. If South American economies can recover like the U.S. economy was able to, profits will flow into the auto industry. In the depths of the Great Recession, U.S. SAAR fell to 11.29 million units in 2009. The rate in June of this year stood at $17.25 million units, a 52.8% increase.

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A flat 50% increase in South America would mean about 8 million units being sold from today's levels, approximately 2.7 million more units.

Europe

Speaking of rebounding economies, Europe's recovery seems to be gaining some serious traction. There have been some hiccups along the way and almost definitely a few remaining, but all in all the state of the European Economy looks much brighter than it did a few years ago. Europe has been in the red for Ford for years but the company remains confident it can achieve full-year profit by 2015. F actually managed to turn a profit of $14 million in Europe this past quarter but guided that the full-year figures will be about breakeven. This was the first quarterly profit in Europe since 2011. Ford recently announced that it will be producing its Fiesta model in Cologne, Germany, in a move that should save the company $400 million through 2021. Last year closed an inefficient plant in Genk, Belgium. Akin to South America Ford's market share is low (very low when compared to North American market share) at only 7.9%, and the ONE Ford plan will be crucial in the attempt to raise this number and increase profit via cost reduction in the coming years. F also has announced that it has begun production of its new Mondeo and new Focus in Europe.

Middle East and Africa

The Middle East and Africa segment is brand new in Ford's overall business structure, having been broken off into its own segment in January. This region epitomizes what Fields and former CEO Alan Mulally had envisioned with the ONE Ford plan: new releases at low cost to the company. After the Middle East and Africa launch announcement, Ford outlined its aggressive plan for the segment in which it will release 17 new vehicles by the end of 2015. In that same release, the company stated that it expects the auto market in that region to increase by 40% by 2020. The Middle East and Africa only generated $1.1 billion in revenue for Ford in Q2, and with the vast overhaul of offerings underway this segment is really more of a "wait and see" kind of scenario. Despite its infancy, this region surely has potential to help Ford's growth for the rest of the decade and beyond.

Asia Pacific

Asia Pacific is arguably the most talked about foreign segment for Ford because of, well, China. Investors across all industries are focused on China and booming growth the country has seen over the last few years. Ford's first half sales this year accelerated 35% from last year's pace as the company is making strides to break into the Chinese auto market. Auto sales in China have long been dominated by domestic manufacturers, but foreign car makers are significantly increasing their presence. In Q2 F earned a market share of 4.4%, a company record. For the region as a whole Ford reported a market share of 3.7%, higher than the 3.3% mark achieved last year. With a SAAR of 39.6 million for the Asia Pacific segment and rising market share, this region will be massive going forward for the Blue Oval as it tries to grow for years to come. Another upcoming tailwind for Ford is the pending release of its Lincoln brand in China, expected to occur this Fall.

Conclusion

Although North America has been the primary reason for Ford's success over the years, its operations overseas will be a huge factor in profitability in the future. The ONE Ford Plan is going to create excitement about the Ford brand in all regions across the world. The company has been making the right strides for years and is taking 2014 and 2015 to position itself to benefit the most for the foreseeable future. North America, of course, will still be a major part of the company's prospects but in terms of growth, investors need to look outside the continent to understand the sales potential.

Disclosure: The author is long F. 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.