Ford (NYSE:F) has done well in Europe this year. The company has been able to turn around its European operations from a loss-making one a few years ago to breakeven and then into a profit making one. The six-month period between January and June 2016 was the company's best first half since 2010 with respect to total vehicle sales in the traditional 20 European markets i.e. "Euro 20." In addition, it was also Ford's best commercial vehicle sales period since 1993 in the Euro 20 markets.
Reading between the lines
However, Ford still does not lead the European automobile industry going by any measure. In fact Ford trailed the industry's gains during the first half of the year. Talking of Euro 20, Ford's sales increased 7.4% to 718,300 vehicles, compared with the industry's growth rate of 9.3%. In the month of June, that gap was even wider. Ford's registrations were up 2.6% to 130,200 in its Euro 20 markets, compared to the industry's larger 6.7% rise.
But the reason for the widening of that gap was that the U.K. decided to exit the European Union (Brexit happened). That was toward the end of June. So, after that, the analysis of the industry should be done in light of the Brexit. The impact, however, will be seen over the long term as the U.K. will take its time to carry out the process of exiting the union. That time won't be shorter than a year and that process might just change the rules of the European Union in favor of the U.K. as a result of the on-going negotiations.
We are now into the fourth quarter and the third quarter has passed with almost no immediate negative impact. While the sales figures for September are yet to be revealed, in August, Ford edged higher by 8.5% and sold 74,800 vehicles in the Euro 20 markets, its highest level since 2007. Year to date (till August), Ford's European sales volume has clocked nearly 900,000 units, which is its best figure for that time period since 2009.
But again, this looks great only when you look at it in isolation. When you pay attention to the market share in the Euro 20, Ford lost 30 basis points in August with its market share dropping to 7.6%. The year to date market share in the Euro 20 markets has also declined by 10 basis points to 7.9%. This again means that Ford is still trailing behind the industry in these markets. In fact, it trailed the larger market's gain of nearly 10%.
The silver lining
However, despite the weakness in the volumes, there is a silver lining that investors should not miss. The good news for investors is that Ford's sales mix continues to remain very healthy in Europe. In August, the sales of the EcoSport SUV doubled to 3,200 units while the Kuga (which is seen as the twin of Escape) sold 7,800 copies, am increase by 2,500 over the month of August last year.
As a result of this performance, the total SUV sales of Ford in Europe increased 71% during August as compared to the prior year. In the first eight months through August, Ford sold 122,000 SUVs in Europe, which was a jump of almost 39% compared to the same period last year. Now, SUV sales generate fatter margins and hence such an increase in SUV sales should have a positive impact on Ford's bottom line performance.
Another set of high margin products, Ford's premium trims, continue to gain momentum in Europe. The sales of Ford's Titanium trim were more than 41% of total car sales in August and were 300 basis points higher for the first eight months of the year. This trend is expected to continue throughout the remainder of the year and will ensure sustained profitability of the American giant in Europe. This is because the company is able to sell its top-end variants at incremental prices as compared to lower trims, leading to more profitability.
Meanwhile, in the commercial vehicle space, there is still no one on top of Ford in Europe. The sales of the Ranger pickup and Transit van line were higher by 15.3% during the month of August. Further, the sales were higher by 17.6% year-over-year making the company the top commercial-vehicle brand in the continent so far in 2016.
There are certainly risks associated with the economic disturbances that are taking place in Europe. The Brexit in itself is definitely expected to impact the automobile industry as a whole. Many companies manufacture in the U.K. and export to the remaining countries of the European Union. So, the tariffs imposed as a result of Brexit will make the vehicles costlier which will impact the sales.
But, when you look at Ford's performance this year till date, it is quite appreciable. Ford has turned and remained profitable in Europe. Its sales have remained strong, especially in the high-margin segments, although it lost some market share. Most importantly, Ford has discovered some pockets of growth in Europe within its sales mix. If its sticks to those growth segments, it will definitely be able to sustain its European turnaround.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.