Why Sales in China Could Drive Ford's Stock Up -- and Up

As China’s massive population comes into focus as the biggest auto market, Ford’s stock is primed to pad portfolios.

Feb 10, 2014 at 11:43PM

Ford (NYSE:F) is enjoying an impressive streak of sales increases in China. Last year, the automaker had the top-selling car in China, with the Focus, and it's seeing incredible sales growth -- north of 30% annually. It's little wonder that Ford's recent annual reports have emphasized the company's emerging presence in China. Management is going to be devoting a lot of resources to the nation in the future, and the strong sales growth should continue.

Does that make Ford an attractive stock to add to your portfolio? Let's take a closer look.

Auto sales growth in China
A Jan. 31 CBS article quantifies the sales growth potential for automakers. Quite simply, there are a ton of people in China, and many of them don't own a vehicle -- yet.

With more than 1.35 billion people -- over 4 times the U.S. population -- China offers the largest single market in the world. Of course, that huge population wouldn't mean much for auto sales if the vast majority of Chinese couldn't afford to buy a car. But according to a 2012 CNNMoney report, China's middle class is growing quickly and stands at "more than 300 million" -- the same as the U.S. population. Furthermore, less than 10% of China's population has a car, compared with the U.S., where there are about 80 vehicles for every 100 Americans. It all translates to increasing auto sales for years to come. 

Pick your poison
But why are we focusing on Ford? Why not General Motors (NYSE:GM)? Or Volkswagen (NASDAQOTH:VLKAY)? GM boasts higher annual sales than Ford, and Volkswagen is currently the top auto seller in China. What is it about Ford that makes its stock the one you should hold to capture these future growth opportunities?

First, I've recommended investors choose Ford over GM for a long time, mostly because of Ford's superior management. Alan Mulally is an exceptional CEO who has proved his ability to lead his company to profitability through the worst of times, all while innovating products and staying in touch with what customers want. Mary Barra, GM's new CEO, may prove to be as effective of a leader in time, but Mulally's track record of success is one worth betting on.

Aside from Ford's leadership advantage, its operations are also more efficient. Ford's profit margin is far greater than GM's, and this is one of my favorite metrics when comparing very similar manufacturers.

Now, what about Volkswagen? VW sold almost two and a half times as many vehicles in China last year as Ford did. But those high sales numbers are already built into Volkswagen's price. In other words, everyone knows that VW sells more than 2 million cars in China. Ford, meanwhile, has significant growth potential in the market, and that's going to be a major driver in the appreciation of Ford's stock over the next 10 years.

A good time to buy
At The Motley Fool, we don't mess around with short-term, high-turnover trading. We don't day trade or look for quick bets. Instead, we invest in good companies and focus on generating long-term wealth.

Yet no matter how long an investor holds a stock, the return earned is directly related to the price that investor paid for it. Therefore, we have to look at what the market is doing today, and plan around certain price behaviors. 

To that end, Ford is cheap right now. After sliding into "it's on sale!" territory about three weeks ago, the stock is trading at 11 times earnings. It's a good time to buy.

But I encourage you to be active in your own research on these stocks. The opportunity in China is open for any automaker to seize, and if you're in love with the stock of another automaker that has a chance to grow its market share there, then by all means, try to capture some of that wealth for yourself.

Just make sure you're picking a company with effective leaders, strong financials, and a strong brand. If that's what you're looking for, you certainly can't go wrong with Ford.

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Brian Anderson has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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