Ford: Buy or Sell?

Ford (F) has had a mixed sales performance in US sales in the first two months of this year. To start the year 2016 with, the January unit sales of the company dropped 3 % in contrast with the arch rivals and fellow Detroiters, General Motors and FCA, who posted single-digit gains over the month of January 2016. But this was followed by a 20 % year-over-year increase to 217,192 units in Ford’s US sales during February 2016 which came in well above competitors.
The industrial growth for February was 7 %.

One common trend for both of the months was that Ford's SUV sales remained very strong despite the challenges. Also, its pricing remained strong. Despite a drop in the F-series sales in January, its average transaction price increased by $ 2,500 Y-o-Y. Ford also had to spend $ 500 less on incentives on pickups compared to January 2015. Pricing was also strong in February due to higher sales of the Mustang, F-Series, and other SUVs that command high margins. There was a pick-up in the F-Series sales by 10 % after a slow January. Mustang, which saw a 13 % decline in January sales saw an 18.2 % increase in February. Furthermore, the company increased its average transaction price at almost double the industry average due to the continued success of its larger vehicle offerings. These are certainly positive indicators for Ford’s future at its home in 2016.

Carrying the momentum:

In fact, the company has carried on with its sales momentum of the last year into 2016 while keeping the average transaction price high. The operating margin increased 120 bps compared to 2014 to 10.2 % for the last year. That was way ahead of the company’s own target range of 8.5 %-9.5 %. Q4 2015 was a record quarter for Ford at the end of which it reported its highest annual sales in the U.S. in a decade. The fourth quarter was the company’s most profitable ever in the region, with an operating income of over $ 2 billion.

Ford has a strong net cash position as well. At the end of 2015, it had $ 23.6 billion in cash and another $ 10.9 billion in available credit lines. Its automotive debt was at its lowest level since 2000 at $ 12.8 billion.

The F-150, after its transformation to aluminium last year, again ranked number one among the top-selling vehicles in the country for a 34th consecutive year. In addition to the best-selling truck, Ford’s luxury brand Lincoln posted its best ever sales in the U.S. since 2008. Further, the company’s SUV’s sold 21 % more units through the last year compared to 2014.

Market outlook:

North America has always been critical for global automakers like Ford. Apart from being the second largest car market, it is the most profitable market too. And Ford has pressed the right buttons by introducing some great models in the booming and highly profitable segments like SUV, truck and luxury vehicle segments. It has gained a lot of market share in the initial 2 months of this year.

However, the company has indicated that it expects to post a lower North American operating margin of at least 9.5 % for 2016 compared to the 10.2 % it achieved for 2015. Ford CFO, Bob Shanks considers this margin to be still strong by historical standards.

One of the factors that will affect the company’s bottom line and margins would be a slower industry sales growth. Secondly, the company is going to launch the 2017 version of the Super Duty truck in the U.S. in the second half of this year which will attract substantial costs. Thirdly, it is venturing into newer territories like smart and electric vehicles to fend off the likes of Apple, Google and Tesla. This will also mean a lot of capital as well as operating expenditure, putting a lot of pressure on the bottom. Thus, one should expect Ford’s full-year 2016 results to match or only marginally beat its 2015 revenue, operating margin, pre-tax profit, and earnings per share.

Upcoming models:

Ford debuted the new model GT at the 2015 Detroit Auto Show. Another crowd pulling model, the Raptor, is expected to increase the traffic into dealerships across the US and the rest of North America. The face-lifted Lincoln Continental is also a great car and should encourage the luxury American buyers.

Conclusion:

Ford is having a ball in North America at the moment. Some of its riskiest strategic moves like the change in its bestselling F-150’s body to aluminium has clicked. Its margins are broad and liquidity position strong. The growth in industrial sales is expected to slow this year. However, Ford is in such a position at least in North America that it may end up gaining more market share that its peers.
Published on Apr 22, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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