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1 Gigantic Reason to Remain Bullish on Ford Motor Company

There are many reasons to be bullish on Ford (NYSE: F  ) , too many to cram into one article. So, I'll narrow the list down to the one big reason I'm bullish on Ford: Its position in the world's largest automotive market, China. Here's why I think that the company is well positioned to overcome its late start in the country that will be so important to Ford realizing its growth potential.

What's the big deal?
China and the United States are the two largest automotive markets, but look at the difference between their respective growth forecasts through the remainder of this decade:

Graph by author. Data from Automotive News DataCenter, WardsAuto, LMC Automotive. *2020 estimated.

Most analysts predict that vehicle sales in China will surpass 30 million units annually by the end of the decade, and some even believe it will happen as soon as 2018. That means China could be responsible for nearly a third of global new vehicle sales by 2018 -- a staggering piece of the pie.

China's economy continues to grow and that means a surging population of wealthier consumers. That not only bodes well for its automotive market as a whole, it also means a quickly expanding market for luxury vehicles. Some analysts expect the luxury vehicle market in China to surpass the U.S. market in sales around 2016; according to Forbes, its luxury market penetration is less than 10%, compared to 40% in the U.S. -- leaving plenty of room for growth.

So how would this growth translate to Ford as an investment?

Ford executives admitted that the company should have entered China's automotive market half a decade earlier. Because of its late start, it's even more vital for Ford to make up for lost time; in 2012, the company invested $5 billion to build facilities and increase production. Consider that Ford's Asia-Pacific region, which is composed mostly of China, today accounts for roughly 8% of company revenue. By the end of the decade, the region is expected to represent 40%. That's a big deal, especially for investors worried that Ford is too dependent on North America.

With the stage set on the importance of China's gigantic auto market, here's why I like Ford's position.

The sweet spot
China's growing economy and automotive market will incrementally create first-time car buyers, but it also means that there will be more second-time buyers. The trend for second-time buyers is to trade up to bigger and more expensive vehicles -- a trend that should equate to rising transaction prices and margins. 

Here's the kicker, though: As Chinese consumers' tastes continue to trend toward bigger and more expensive vehicles, government opinion is trending toward much more stringent pollution and fuel economy regulations. That means automakers will have to hit a sweet spot that includes size, fuel economy, and value. That's easier said than done.

Fortunately, those are the exact points Ford's "One Ford" plan has emphasized, which enabled the Blue Oval to construct one of the greatest business turnarounds in recent history. Ford vehicles such as the Fiesta, Focus, Fusion, and Escape helped it steal market share in the U.S. last year -- gaining more than any other major automaker -- and should do the trick in China as well.

Graph by author. Data from The Wall Street Journal

"One Ford" will work in China
Ford's smaller Focus was the best-selling nameplate in China in 2013, and industry analysts look for it  to repeat that success this year. Sales of smaller vehicles will remain robust, but as consumer tastes change to larger vehicles look for Ford's Mondeo (Fusion) to have much of the success it does in America due to its more aggressive design in a typically bland segment.

Lincoln's 2015 MKC. Source: Ford

Also, Ford's Escape, known as the Kuga in China, has sold extremely well in the U.S. and will be well positioned to take advantage of the SUV/crossover segment that is expected to triple in sales in China from 2011 to 2020. 

Furthermore, as Chinese consumers trend toward higher-priced vehicles it will set the stage beautifully for the Ford luxury lineup, which is being refreshed and prepared for a debut in China later this year. One of the first Lincoln vehicles to sell in China will be the MKC, a luxury crossover.

The company's "One Ford" strategy is already showing signs of success in China.

Ford is on pace to double its production capacity, market share, and sales in China, compared to 2012 levels, by the end of next year. Just last month, Ford topped 100,000 sales in China -- a monthly record. Last month's sales performance capped off an excellent first quarter during wdhich sales in China surge 45% over last year's first quarter. The following chart shows just how quickly monthly sales have accelerated:

Graph by author. Data from Ford China monthly sales releases.

Foolish takeaway
If Ford wants to grow its top-line revenue faster than its competitors, and bring more potential to its bottom-line profit, capturing more than its fair share of China's massive growth will be key. Ford is well positioned to accomplish just that in the world's largest automotive market, and to boost revenue growth and earnings potential. That's one big reason to be bullish on Ford's stock over the long term.

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Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2014, at 2:02 PM, AmericanFirst wrote:

    What makes F's progress / potential in China so amazing.............F's doing it on their dime competing with their #1 competitor GM, who received $125B in bailout funding, tax benefits, debt relief per the GM Bailout.

  • Report this Comment On April 14, 2014, at 2:31 PM, dennypat38 wrote:

    Ford has made 40 billion in the last 5yrs more money then they made in the preceding 20 yrs this stock shoud be 40 a share NOW?

  • Report this Comment On April 14, 2014, at 6:29 PM, ccbarry wrote:

    A Ford + BMW marriage would result in the greatest automotive company in the world.

  • Report this Comment On April 14, 2014, at 6:31 PM, cornsoyfarmer wrote:

    With Europe not losing money in a couple of years and China coming on strong along with several global spots I agree with the 40 mark with no problem! How about that Dividend?!

  • Report this Comment On April 15, 2014, at 10:01 AM, TMFTwoCoins wrote:

    @AmericanFirst It is impressive, as always, though I promise you don't have to tell me everyday :)

    @dennypat38 Not quite $40 billion, (2009 ruined that) but $33.5 billion in the last 4 years is still impressive considering how recently Ford was burning tens of billions.

    @ccbarry we can dream, right.

    @cornsoyfarmer Totally agree, regarding the dividend. It's a really overlooked aspect of Ford, I'll be writing about that shortly.

  • Report this Comment On April 16, 2014, at 8:07 AM, HammerHead411 wrote:

    "A Ford + BMW marriage would result in the greatest automotive company in the world."

    OMG, hasn't Ford already tried this via PAG (Volvo, Jaguar, Land Rover & Aston Martin) with disastrous results. Foolishly extending their focus to luxury brands cost the company $30+B (in buying and continued operating losses) and nearly finished the company. FoMoCo is back on track for one reason.....they've returned their focus 100% on the core Ford brand. Let's not even think of repeating that mistake again. No, Ford buying a luxury foreign brand is out of the question. Also, the UAW wouldn't allow this as BMW uses non-union facilities in NA.

  • Report this Comment On April 16, 2014, at 9:29 AM, TMFTwoCoins wrote:

    @HammerHead411 While that's a valid point, having a successful global luxury brand is becoming a must-have for automakers. That's why Ford is now pumping money into its Lincoln brand to try and revive it in the same fashion it did its core Ford brand.

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Daniel Miller

As a Motley Fool Industrial Specialist, I use my marketing and business background in the automotive industry to evaluate major automakers and other large industrial corporations. Follow me on twitter for tweets about stocks, cars, sports, and anything I find amusing.

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