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We are cautious on auto makers including Ford (NYSE:F) in the near term given the several macro headwinds hammering the global markets that could negatively affect consumer and business sentiment including vehicle sales growth. Even though we are bullish on Ford’s fundamentals as the company managed to grow its vehicle sales in Q2 due to its refreshed fuel-efficient product line-up and investment in new technologies, the company will suffer if the auto market slows down meaningfully. Moreover existing concerns such as an increasing mix of small cars, rising commodity costs, higher structural costs and potential competition from new entrants remain and will likely weigh on Ford’s sequential growth. Ford mainly competes with auto manufacturers like BMW [GR:BMW], GM (NYSE:GM), Daimler (ETR:DAI), Audi (NSU:GR), Honda (NYSE:HMC), and Toyota (NYSE:TM).

Our $14 price estimate for Ford stock is about 30% above current market price and is based on the company’s intrinsic value. In the last few weeks Ford’s stock has taken a beating because of the recent market sell-off and concerns over global growth.

Sales Will Take a Hit if Global Growth Stalls

Ford has indicated its long term strategy in its mid-decade outlook. [1] Ford expects to achieve significant global sales growth, refreshed product portfolio, and stronger margins by focusing upon its ‘One Ford’ plan.

Under this plan, Ford aims to restructure to achieve better operating profitability and improve its balance sheet. It also aims to accelerate the development and production of new cars with a focus on better designs, fuel-efficiency, safety and value for customers with the latest launches. We wrote on this in our previous post titled, Ford’s Market Share Benefitting from “One Ford” Plan.

But Ford’s growth plans remain reliant on continued global growth. Currently, global growth is threatened by several macro headwinds such as Euro-zone debt crisis and concerns over U.S. growth both of which can decelerate growth in export-reliant Asian economies and fuel inflation due to prolonged easy money policies. This ultimately can feed through to higher inflation in markets like China and India and undermine Ford’s growth plans and industry-wide vehicle sales growth.

(Charts created using Trefis' app)

Need to Watch Materials Costs

Automotive margins have been under pressure due to increasing commodity prices as well as higher material and product-related costs. In the medium-term, the global economic slowdown will likely reduce commodity prices due to reduced industrial demand and thus increase Ford’s gross margins. However in the longer-term, we expect commodity prices to increase on the back of demand from emerging economies which will pressure gross margins again.

Moreover, a few near-term macro concerns such as the increasing mix of small cars, rising commodity costs, higher structural costs, and potential competition from new entrants remain and could depress Ford’s earnings.

You can drag the trend lines in the modifiable charts above to see the impact of these trends on Ford’s stock value.

Notes:

  1. Ford Mid-Decade Outlook

Disclosure: No positions

Source: Tapping the Brakes on Ford's Stock Amid Macro Turbulence