Why Ford Remains a Solid Investment Despite Short-Term Pains

Ford (NYSE: F  ) recently released its results for the fourth quarter and the numbers were pretty good in comparison with last year. The automaker's net income rose considerably. Despite the good numbers, investors raised their eyebrows at Ford's decreasing margins, which occurred because of tough competition from Japanese automakers. However, compared to peers like General Motors (NYSE: GM  ) and Toyota Motor (NYSE: TM  ) , Ford is on the right track.

Looking ahead, 2014 is going to be a period of transition in the U.S. market, which is why investors should take a closer look at what the company is up to.

A closer look at the quarter
Ford posted pretty good results in its fourth quarter. Revenue rose 4% to $37.6 billion, while net income rose to $3 billion from last year's $1.6 billion. However, the profit figure includes a gain of $2.1 billion from deferred tax assets along with last year's pension buyout and plant closure in Europe. Also, Ford's North American earnings before tax declined $200 million to $1.7 billion because of aggressive vehicle pricing.

On the other hand, Ford's European operations showed signs of improvement from last year as the loss from these operations came down to $571 million. Operating margin and pre-tax loss came in at -5.8% and $1.6 million in Europe, respectively. Ford's European market share remained unchanged in the fourth quarter year on year.  

Moreover, Ford's South American operations posted a loss of $126 million versus a profit last year. The loss came on account of plant downtime in Brazil so the automaker could prepare for new launches in 2014, along with lower production in Venezuela due to limited availability of dollars. The pre-tax loss of $271 million was partially offset by higher pricing. 

What the road ahead looks like
As mentioned above, 2014 will be a phase of transition for the automaker. The company is planning to roll out around 23 new models globally, calling it "the busiest year in its 111-year history." Because of these new launches, Ford's margins will be pressured. Along with that, because of tough competition, Ford's margins have also decreased.

However, investments in new vehicles should help Ford do well in the future if we look past the short-term pains. In reference to the market abroad, the automaker is positive about Europe and estimates that it will cover its losses and reach a break-even point by 2015. It is counting on new models to boost its growth in the eurozone.

The company has launched 11 new vehicles over the past 15 months and plans to roll out 10 new models in 2014 alone. These moves have reaped fruit as Ford's sales grew 9.2% in Europe in January, and the launch of new models should help the automaker sustain the momentum.  

Also, China seems to be a strong market with bright growth prospects for Ford. Auto sales in China rose 14.1% in the fourth quarter, and production rose 21.2% over last year. The strong growth in China was driven by passenger cars. The January data shows a rise of 53% in Ford's sales in China. With new launches scheduled one after the other in 2014, the company is looking forward to capturing more market share. 

The ailing South American economy is still a concern for the automaker, but it will continue with its strategy of expanding its product lineup and replacing older models. Ford is also bolstering its infrastructure worldwide to support the production of new vehicles, along with the innovation of new products. 

The company intends to add 5,000 new jobs in the U.S. alone and another 6,000 abroad in 2014. Many of these jobs will be allocated to research and development. The automaker is focusing on battery-based technology as the U.S. and other markets are tightening their emissions and mileage standards.  

Peers under trouble
Toyota, the largest automaker in the world, is having a trying time as it landed the unwanted title of the automaker with the most recalls for the second time in a row in 2013. Toyota had nearly 5.3 million recalls in the U.S. in 2013. The defects included faulty air bag deployment, suspension problems, among others. The trend looks set to continue this year as Toyota has already recalled 700,000 units of its 2010 to 2014 Prius models and 260,000 units of its 2012 RAV 4 models, as well as its 2012 to 2013 Tacoma models and its Lexus RX350 models. 

The Prius is suffering from software issues that could lead to a sudden loss of power. This would definitely hurt Toyota's brand equity and enable Ford to capture more market share.

On the other hand, GM has also started the year on a negative note as it has already recalled 778,562 units of the 2005-2007 Chevrolet Cobalt and 2007 Pontiac G5 compacts in North America. This recall was initiated after six people died due to faulty ignition switches, according to USA Today. So, this misstep by Ford's biggest rival could hand the automaker an advantage as people dying because of a faulty car is not good publicity at all.

Bottom line
At a trailing P/E of 8.65 and a forward P/E of 7.94, Ford looks promising and cheap when compared to both GM and Toyota. GM is more expensive at 15 times earnings while Toyota doesn't look promising as its forward P/E is lower than the trailing figure. Although the first quarter might be a bit painful as Ford might see some decline in profit, the decline will be on account of new launches, the addition of new jobs, and plant downtime. These short-term pains will be forgotten as the company starts to reap the fruits of its new launches and its improving market share across the globe.

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