Ford (NYSE:F) has taken a breathtaking 5.5% plunge on bad news out of Europe.
Posting an expected 2 Billion dollar loss out of Europe, investors are pulling out like the house is on fire. However, something needs to be understood; Ford as a company is not bad, it is Europe which is bad. To sell Ford, which normally makes most of its sales from North America, India and China, simply because Europe is doing poorly, is like selling Apple because tablet sales in Nigeria were poor.
First, I would like to say that to run a tablet manufacturing facility in Nigeria would be very costly and have very low benefits in a market were tablets are not demanded or affordable.
The same naturally goes for Ford. As a company which has turned around since 2008, and has made massive sale gains in North America and China, it is actually cheap. However, the 2 billion loss signals that Ford is not properly managing Europe, or even entirely in understanding of the European market.
The unemployment rate in many European countries is still fairly high, and traveling by car is becoming more unfavorable by many European households. Households without cars have increased over the past decade from 40% of homes in 2001 to 45% in 2011, and as these European economies remain stagnant, the likelihood of any increase in new car purchases seems unlikely. This is especially true in a place where there is high anti-American sentiment.
If the Europeans are going to buy a car, they are much more likely to purchase one that is locally made by a manufacturer of their own European nation, in the belief they will strengthen their own economy more. Interestingly enough, this same phenomenon has been increasingly occurring in America as well.
Another factor worth mentioning is that European cities are becoming increasingly unfriendly to cars, splitting roads to make way for bike lanes and giving more room to other forms of public transportation.
Europe is not a friendly market for any auto manufacturer, especially an American one, and it has yet to recover from its all-permeating recession.
Ford is now almost back to pre-2013 levels due to this bad news, and frankly this should not be the case. The fundamentals of this great company will still be there, and they are likely to cut their losses in Europe. One of the best moves they can make is to stop most production lines in Europe and limit sales mainly to the Ford Transit and Fiesta, which are great for the European consumer style. Production needs to be significantly ramped down, however.
Another solution I would recommend other than pulling out almost entirely would be to create a new brand name which sounds European, and producing these only in the wealthier, car-friendly economies. By doing this, it absconds Ford's duty to produce Cars that appeal to both Europeans and Americans, and allows them to keep the markets entirely separate. This allows for 2 completely different brands and styles for 2 completely different economies and cultures, prompting increased sales in both continents.
Globally, Ford saw a 7.5% increase in car sales despite a 25.5% drop in European sales. For this reason, it makes little sense for the stock to drop so drastically. It was not over-valued at a P/E of 14, and it is not over-valued now. Look to the performance of North American, Indian, and Chinese economies for signals on how Ford will perform in the future.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FORD over the next 72 hours.