Ford Motor Co.
/ (F-NYSE)/ Equity Research / F | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 06/11/2014
Current Price (06/10/14) / $17.01
Target Price / $18.00
SUMMARY
We are raising Ford to Neutral from Underperform based on market share gains in the Asia-Pacific region, particularly China, Ford’s global expansion plans, its efforts to make the European business profitable, efficient capital deployment, the success of the One Ford plan and continued focus on hybrid cars. However, an expected decline in pre-tax profits, operating margin and cash flows in 2014, weakness in North and South America, frequent product recalls and rising expenses are headwinds. Ford posted earnings per share of $0.25 in the first quarter, missing the Zacks Consensus Estimate and the year-ago earnings.Revenues grew 0.8% to $35.9 billion, exceeding the Zacks Consensus Estimate of $34.49 billion./ Equity Research / F | Page 1
SUMMARY DATA
52-Week High / $17.7652-Week Low / $14.55
One-Year Return (%) / 12.61
Beta / 1.60
Average Daily Volume (sh) / 23,915,864
Shares Outstanding (mil) / 3,954
Market Capitalization ($mil) / $67,258
Short Interest Ratio (days) / 2.68
Institutional Ownership (%) / 54
Insider Ownership (%) / 2
Annual Cash Dividend / $0.50
Dividend Yield (%) / 2.94
5-Yr. Historical Growth Rates
Sales (%) / 4.5
Earnings Per Share (%) / -3.0
Dividend (%) / N/A
P/E using TTM EPS / 11.7
P/E using 2014 Estimate / 12.8
P/E using 2015 Estimate / 8.9
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Low,
Type of Stock / Large-Blend
Industry / Auto -Domestic
Zacks Industry Rank * / 73 out of 267
OVERVIEW
Ford Motor Company (F) is an auto manufacturer and auto financial services provider with operations in the U.S. and across the world. The company manufactures and distributes automobiles in 200 markets across 6 continents.
Ford has two operating sectors — Automotive and Financial Services. The segments under the Automotive sector have been restructured as Ford North America, Ford South America, Ford Europe, Ford Middle East & Africa and Ford Asia Pacific. The Automotive sector (which generated roughly 94.4% of the company’s total revenue in the first quarter of 2014) is engaged in the design, development, manufacture, sale and service of cars and trucks. More than 60% of the consolidated auto revenue is derived from truck sales, while car sales generate the balance.
The Financial Services sector (5.6%) includes the segments of Ford Motor Credit and Other Financial Services. Ford Motor Credit deals with vehicle-related financing, leasing and insurance, while the Other Financial Services segment includes a variety of businesses such as holding companies, real estate and financing and leasing of its vehicles.
The company’s key competitors include Chrysler Group LLC, General Motors Company, Honda Motor Company, Nissan Motor Company and Toyota Motor Corporation.
REASONS TO BUY
Ford is pursuing a major expansion plan in the mature and emerging markets, primarily Argentina, Brazil, China, India and Thailand. The company expects Asia-Pacific (mainly China and India) to account for 70% of its global growth in this decade and generate 40% of its vehicle sales in the next 4 to 5 years. The popularity of the expanded product line-up in China boosted the automaker’s sales by 49% in 2013.The improvement continued in 2014, with a 39% increase in sales to 461,473 vehicles in the first 5 months of the year. The company forecasts global sales to expand by 50% to 8 million vehicles by 2015, given the potential for growth in Asia (mainly China and India) and rising demand for small cars. The automaker anticipates small cars to account for 55% of total sales by 2020, compared with 48% at present. One-third of small car sales are expected to come from Asia. Ford projects compact car sales in India to reach about 2 million vehicles in 2018, almost double from the 2013 level. In order to support the increasing sales, Ford aims to extend dealerships in India to 500 by 2015 and in China to 680 by 2016. In 2013, Ford raised its stake in its Chinese light commercial vehicles joint venture, Jiangling Motors Corp., to 32% – the maximum limit allowed by the securities regulator – from 30.0%.Apart from China, Ford expects to benefit from its focus on manufacturing operations in India. Ford plans to boost exports of its engine production from India by shipping them to Europe. Currently, the automaker exports 40% of its India-made engines and 25% of its India-made cars to 35 countries. It intends to manufacture 450,000 cars and 600,000 engines in India by 2015. It has already invested $2 billion to build manufacturing facilities in India. Ford has also started shipping locally-manufactured EcoSport compact sports utility vehicles in India to tap the growing market for mini-SUV.
Ford has created a new business unit – Ford Middle East and Africa, to capitalize on the growing importance of the Middle East and African markets. The combined region is expected to witness a 40% surge in industry sales to 5.5 million by 2020. To strengthen its foothold in this lucrative market, Ford will launch 17 new or revamped cars under the Ford and Lincoln brands in 2014 and 2015. The company also intends to make customer support and car parts easily available in the region.
Ford’s accelerated product transformation plan “One Ford” is positively impacting the company. The foremost mission is to produce common vehicle models for all of its global segments. Another key objective of the plan is to shift focus from trucks to small cars and deliver more vehicles from fewer core platforms. Ford has already renewed the majority of its product line-up along with a few discontinuations and has planned several launches under the “One Ford” plan. Further, Ford expects to meet the challenges in Europe and South America by executing its One Ford plan. The company intends to launch 6 Lincoln models in 2014. It also plans to rollout 25 new models in Europe between Sep 2012 and Sep 2017 to drive car sales in the continent. It also proposes to triple its line-up in China by introducing 15 models by 2015. In order to develop these new models, Ford will build new plants raising its capital spending to about $6 billion annually by mid-decade from $4.3 billion in 2011. In Apr 2014, Ford also introduced its Lincoln luxury line-up in China’s booming luxury vehicle market. The automaker will launch 5 new Lincoln vehicles in the nation by 2016.Fordhas massive expansion plans for 2014 as it intends to hire 12,000 workers in the U.S. and Asia to support the expected launch of 23 new models worldwide during the year, which includes 16 in North America. The automaker will also open 3 new manufacturing facilities, 2 in Asia Pacific and 1 in South America.
Ford is also turning toward capital deployment to boost shareholder value.In the first quarter of 2014, the automaker increased its quarterly dividend by 25% to $0.125 per share. In May 2014, the company’s board approved a new repurchase program for 116 million shares.These share repurchases will offset the impact of share dilution and help improve shareholder returns.
Ford continues to focus on hybrid vehicles that have played a pivotal role in its revival since late 2006. The company announced its plan to invest $135 million to develop key components, including advanced battery systems for its next-generation hybrid-electric vehicles. It is looking forward to double its battery-testing capabilities to 160 individual battery-test channels. Ford targets to boost development of hybrid-electric vehicles by at least 25%. It also plans to reduce the cost of its current hybrid system by 30% compared with its previous generation system.
Ford plans to restore profitability in its European operations by 2015 and aims to achieve long-term operating margin between 6% and 8%. Its efforts are yielding results reflected by lower year-over-year loss from the region in 2013 and the first quarter of 2014. Results are expected to improve further in 2014. Additionally, the company intends to launch about 25 vehicles in the continent by 2018.
REASONS TO SELL
Ford expects pre-tax profit, excluding special items, to be in a range of $7 billion to $8 billion in 2014, lower than $8.6 billion in 2013. Automotive revenue is expected to be in line with 2013 figures, while automotive operating margin and automotive operating-related cash flow are expected to be lower than 2013. Unfavorable volume and mix, including impact of new vehicle launches, higher warranty costs for prior model year vehicles and increased structural and other costs are expected to negatively affect margins.
2014 wholesale volume in North America is expected to be lower than the 2013 figure due to production downtime associated with model changeovers. Net pricing is also expected to be unfavorable due to the competitive pricing environment. Additionally, manufacturing, engineering, structural and warranty costs are also expected to be higher. Consequently, the automaker expects pre-tax profit from the region to be lower than 2013. The operating margin guidance range of 8% to 9% is also lower than 9.9% in 2013.
Ford now expects greater losses from South America in 2014thanthe 2013 level. This is a downturn compared with the previous expectation of in-line resultsFord’s South American operation has been facing challenges since 2013 due to weakness in the industry, unfavorable exchange rates, high inflation, capital controls and changing regional trade policies.Ford had to stop vehicle assembly at its Venezuela plant in May 2014 due to a lack of foreign currency to import parts for assembly. The automaker expects further trouble down the road due to low GDP growth, weak industry, high inflation, weak currencies, lower foreign exchange reserves, change in trade policies and political and social uncertainty in some countries.
Ford has been replacing its older models and rolling out new ones. This involves a substantial expenditure, which resulted in high structural costs in 2013. The company expects structural costs to increase in 2104 as well, in order to support higher volumes as well as expansion and improvement of its line-ups. Moreover, Ford will lose production of over 90,000 F-Series trucks when its plants shut down to retool for the production of the new aluminum truck. This will lead to a fall in truck sales, leading to lower profits and lesser market share for Ford.
Like some of its peers, Ford has also been recalling its vehicles frequently to fix safety issues. In May 2014, the automaker announced 4 separate recalls for a total of 1.4 million SUVs and sedans in North America in a single day. The reasons for the recalls ranged from problems in the steering gear to improper installation of floor mats as well as chances of rust formation around the license plate light, which may lead to short circuit and fire. In the same month, Ford also announced the recall of over 692,000 Escape small SUVs and C-Max gas-electric hybrids, mostly in North America, for two safety issues related tofaulty software and problem in the exterior door handles.Earlier in May,Ford also announced the recall of 3,976 commercial versions of its F-Series full-size pickup trucks, mostly in the U.S., as these vehicles can accidentally slip into reverse, which may cause a crash.
Pension and health care at United Auto Workers (UAW) are still major issues for Ford. Although the company has undertaken various restructuring initiatives, these are multi-year processes that depend on ongoing labor negotiations with the UAW. These contract negotiations are very critical for the company to remain profitable in the competitive industry.
RECENT NEWS
Ford Misses on Earnings, Beats Revenues – Apr 25, 2014
Fordposted earnings per share of $0.25 in the first quarter of 2014, down from $0.41 in the first quarter of 2013 (all excluding special items). The company missed the Zacks Consensus Estimate of $0.32.
Pre-tax income declined 37.5% to $1.4 billion from $2.1 billion in the first quarter of 2013. Net income decreased to $989 million or $0.24 per share from $1.6 billion or $0.40 a year ago. Net income for the reported quarter includes pre-tax special item charges of $122 million for separation-related actions and favorable tax special items of $92 million.
Revenues in the quarter grew 0.8% to $35.9 billion, exceeding the Zacks Consensus Estimate of $34.49 billion. The improvement was attributable to market share gains in the Asia-Pacific region, particularly China.
Ford Automotive
Revenues in the sector remained flat year over year at $33.9 billion, despite a 6.2% rise in wholesale volumes to 1.6 million units. The increase in volumes reflects improved market share in all regions except South America and favorable change in dealer stocks. Pre-tax profit plummeted 44.1% to $919 million from $1.6 billion a year ago due to weak results in theAmericas.
In North America, revenues went down 5.1% to $20.4 billion on unfavorable mix, lower net pricing, adverse effect of a weaker Canadian dollar and a 2.5% dip in wholesale volumes to 717 thousand units. The volume was affected by a decline in market share, which offset the increase in industry volumes and favorable changes in dealer stocks. However, pre-tax profit was down 37.3% to $1.5 billion. Results were affected by unfavorable market factors and higher costs.
In South America, revenues declined 18% to $1.9 billion due to unfavorable exchange, volumes and mix, which offset net pricing gains. Wholesale volumes declined 8% to 104,000 units, reflecting lower industry volumes, impact of import restrictions in Argentina and lower production in Venezuela. Pre-tax loss increased to $510 million from $218 million in the first quarter of 2013 due to unfavorable exchange, higher costs and lower volume.
In Europe, revenues increased 18% to $7.8 billion on an 11% improvement in wholesale volumes to 367 thousand units and favorable exchange. The increase in volumes was attributable to higher industry volume, higher market share for Europe 20 and favorable dealer stock changes. The region had a narrower pre-tax loss of $194 million than the year-ago $425 million due to lower costs and favorable market factors and exchange rate, partly offset by lower joint venture earnings and royalties in Russia and Turkey.
In the AsiaPacificsegment, revenues (excluding Chinese joint ventures) grew 19% to $2.6 billion, on the back of favorable mix and an impressive 32% rise in wholesale volumes to 350 thousand units. The increased volumes reflected a 3.4% gain in market share and increase in industry volumes. In China, Ford’s market share improved to 4.5%, fueled by strong sales of Kuga, Mondeo and EcoSport.
The segment reported a pre-tax profit of $291 million, rising from a pre-tax loss of $28 million in the year-ago quarter. The improvement was due to favorable volume and mix and higher royalties from joint ventures, which offset the increase in costs.
In the newly formed Middle East and Africa segment, revenues inched down to $1.2 billion from $1.3 billion on unfavorable exchange and a 5.6% decline in wholesale volumes to 51 thousand units. The decline in volumes was attributable to lower dealer stock increases. The region earned a pre-tax profit of $54 million compared with $47 million a year ago.
Ford’s Other Automotive – consisting primarily of interest and financing-related costs – revealed a pre-tax loss of $222 million, compared with $125 million in the year-ago period. The loss was attributable to net interest expense and an unfavorable fair market value adjustment on the company’s investment in Mazda Motor.
Financial Services
Revenues in the segment rose 17.7% to $2 billion. Ford Credit reported a 1.6% decline in pre-tax profit to $499 million.
Financial Position
Ford had cash and marketable securities of $25.2 billion as of Mar 31, 2014, an improvement of $1 billion from $24.2 billion as of Mar 31, 2013. Automotive debt slightly decreased to $15.7 billion as of Mar 31, 2014 from $16 billion as of Mar 31, 2013.
In the first quarter of 2014, the company’s cash flow from operating activities increased to $2 billion from $0.7 billion a year ago. Automotive operating-related cash flows surged 71.4% to $1.2 billion from $0.7 billion a year ago. Capital expenditures amounted to $1.5 billion, in line with the year-ago period.
Ford is planning to extend its revolving credit facility to $12 billion by the end of April from the present $10.7 billion.
Guidance
Ford expects production volumes of 1.7 million units in the second quarter of 2014, up 32,000 units from a year ago.
Ford affirmed the guidance of pre-tax profit, excluding special items, to be in a range of $7 billion to $8 billion in 2014. Automotive revenue is expected to be in line with 2013. However, automotive operating margin and automotive operating-related cash flow are expected to be lower than 2013 figures.
Ford expects 2014 pre-tax profit from North America to be lower than the 2013 level and operating margin to range from 8% to 9%. Ford expects to report higher losses from South America this year than 2013.
In Europe, Ford is undertaking massive restructuring activities. As a result, the company will be incurring restructuring and launch costs. Overall, in 2014 Ford expects better pre-tax results than 2013 and anticipates attainment of profitability in 2015.
In the new Middle East and Africa unit, Ford expects breakeven results in 2014. In Asia-Pacific, Ford expects pre-tax profit to be higher than the 2013 level.
Moreover, the automaker expects that Ford Credit’s pre-tax profits in 2014 will be in line or higher than the 2013 level. Net interest expense is expected to be about $700 million in 2014.
VALUATION
Currently, shares of Ford are trading at 12.8x our 2014earnings per share (EPS) estimate of $1.33. The company’s current trailing 12-month earnings multiple is 11.7x, compared with the 17.5x average for the peer group and 18.2x for the S&P 500. Over the last five years, Ford’s shares have traded in a range of 4.8x to 13.9x trailing 12-month earnings. The stock is trading at a discount to the peer group and S&P 500, based on forward earnings estimates. The current P/E ratio is at a 97.1% discount to the peer group for 2014. Our long-term Neutral recommendation on the stock indicates that it will perform at par with the overall market. Our target price of $18.00, which is 13.5x our 2014 EPS, reflects this view.