Global automaker Ford (F) announced late June that the firm will see its loss in non-North American operations nearly triple in the second quarter. Ford cited deteriorating conditions in Europe, increased competition in South America, and general weakness in China. Management still believes that capacity increases in North America and China will lead to higher profitability in the second half of the year, but it is clear Europe will struggle. Our fair value estimate for the automaker remains unchanged.
Ford reported that it expects automotive cash flow to be positive, but pre-tax operating profits will be substantially lower. Further, the firm has several investment costs that will be taken in the second quarter, so even profitability in North America may be lower than expected.
We think the long-term transformation of Ford is still intact and that the company is executing well in North America. Ford Credit also continues to improve, but the entity is generally discounted in valuation. However, there is no escaping the soft European market, and Ford, which owns a fairly substantial market share in Europe, is suffering. However, we think some other automakers with large European exposure, namely General Motors (GM) and Volkswagen (OTCQX:VLKAY), could also suffer.
Ford's valuation is extremely attractive at current levels, but we plan to wait for some technical improvement before putting additional capital to work in the name in the portfolio of our Best Ideas Newsletter. Though International weakness has obscured the firm's true value, we expect the name to converge to our intrinsic value estimate in the long run.
Additional disclosure: F is included in the portfolio of our Best Ideas Newsletter.