It looks like Ford Motor Company's (NYSE:F) European troubles will be going on for a while. Last July, the company's European revenue fell by 12.3%, dropping to the lowest level since 1995. Combining the first seven months of the year, sales were down by 10%, a higher rate than the 7% drop in the entire car industry doing business on the continent. This is bad news both for Ford and the European economy as it heads deeper into recession.
Last July, Ford sold 83,100 cars and trucks in the European market consisting of 19 countries. Ford isn't the only company suffering from the European recession and the car companies will have to find a way to tackle the diminishing demand in the continent. In North America, Ford makes enough profit to cover its European losses, however this doesn't mean that the company's European losses should go unattended. The company will have to cut costs, reduce production and make sure that it can return to profitability on the continent as soon as possible. Most of eurozone is either in recession or about to get in recession as we speak, and there is no saying how long the recession will last. Part of the recession stems from the cost-cutting measures adopted by European governments and part of it stems from the low demand from European citizens whose purchasing power seems to keep getting weaker.
Of course, Ford also suffers from heavy cost of labor in Europe and weakness of the euro currency. In addition, the unionized nature of European workforce makes it very difficult for car companies to lay off employees in order to cut costs.
The company still sees growth in certain European countries, namely the Great Britain and Russia. However, the growth is not large enough to offset the slowness in countries like Germany and Italy. While the company's car sales rose by 2% in Great Britain, they fell by 7% in Germany. The company achieved a market share of 7.7% in Europe, making it the Number 2 car company on the continent. If and when the European recession goes away, this will be very bullish for Ford; however, for the time being, it means very little for Ford's investors.
The company is trying to find ways to decrease its production capacity in Europe without having to lay off a lot of employees and trigger a number of legal issues with the unions. The company's CEO Alan Mulally recognized the overcapacity of Ford in Europe and admitted that this was not a cyclical issue, but rather a structural issue. Because the structural issues will not correct themselves over time, some difficult decisions will have to be made.
The company enjoys a strong line-up of new products that are high quality, low on gas consumption and good looking. Ford's products see strong demand in North America, where the economy seems to be growing at a small rate, but still growing. Ford will also seek aggressive growth in Latin America and Asia where the purchasing power of citizens keeps increasing. If Ford is able to cut its costs in Europe and increase its demand in Asia and Latin America, it can easily double its net earnings. Will this actually happen? I believe so. Given Ford's turnaround story in North America during the recession of 2008-2009, the company is able to make and implement the difficult, but right decisions to turn itself around.
Recently, a number of analysts lowered their earnings expectations for Ford, however things still don't look so bad for the company. Analysts expect the company to earn $1.28 per share this year, $1.52 per share in 2013, $1.79 per share in 2014, and $1.97 per share in 2015. If we assign the company a fair value of P/E ratio of 10, we are looking at a price target of $12.8 by the end of this year, $15.2 by next year, $17.9 by the end of 2014, and $19.7 by the end of 2015. The average analyst target price for Ford is $14, which indicates an upside of more than 40% within 12 months. Many analysts are positive that the company will be able to turn itself around in Europe within a couple years. By then, the European economy should at least find its bottom even if the recession continues.
If Ford is able to go through these hard times without adding on to its debt, this will be good enough for me. I understand that Ford has many issues in front of it in the near term; however, many analysts seem to forget that most of those issues are already more than baked in to the current share price of the company. Currently, the company trades for the lowest share price it's seen since 2009 and the share price has a lot of upside potential.
As I always say, Ford is a great investment and it will pay off nicely to patient investors. As always, I would like to emphasize the word "patient" here. In the short term, you may or may not get lucky (for example, take the rally of Ford from last October to March carrying it from $9.70 to $12.70 within a matter of months), however this investment is meant for long-term gains. Anyone who buys or holds Ford should hold it for at least three to five years to see the desired returns. After all, this may be a bad time to sell this stock as it trades for prices not seen since 2009. Last time the S&P was above 1,400 points, Ford was trading for nearly $13 per share and the company is deeply undervalued at the moment.
Disclosure: I am long F.