4 Reasons Why the Future Is Bright for Ford Motor Co.

Sales have been declining recently for Dearborn, Michigan-based Ford  (NYSE: F  ) . However, the outlook for the future is highly promising because of the record number of new vehicles coming out this year, strong replacement demand, rebounding European operations, and increased market share in China. With the company investing in its future and the stock trading at a considerable discount to underlying value, Ford warrants your attention.

Ford has had its challenges in 2014
During the first quarter of 2014 the company increased its sales volume by 6% while revenue only increased by 1%. The company reported first-quarter 2014 operating earnings per share of $0.25 compared to the consensus of $0.31, which largely disappointed shareholders.

Ford's sales volumes declined in three of the first four months of 2014, whereas General Motors reported increased sales in two of the four months. Similarly, Toyota posted much stronger results. Even though the auto industry is experiencing a recovery, Ford is struggling to grow its sales in the U.S. because of intense competition. The company lost market share to major competitors in the first four months of the year.

But Ford is investing in its future
Ford, as part of its ONE Ford plan, will introduce 23 new products that include the new Mustang, the Transit, the Focus, the Edge, the new F150, and the already introduced Lincoln MKC. The company is once again trying to change the auto industry with the introduction of new lighter weight Fusion and F-150 concepts. The most anticipated model is the all new F-150 truck, a reinvention of America's favorite truck. The all-new F-150 has high-strength material grade aluminum alloys throughout its body, which has resulted in weight reduction of up to 700 pounds.

Replacement demand will also increase sales
Moreover, strong replacement demand will also stimulate the company's sales as the critical block of late '90s to early '00s vehicles will start to approach the sweet spot age range for scrapping, most likely no later than 2015. The average vehicle on the road today is approximately 11.4 years old. Therefore, as the economy continues to grow, many consumers will trade in their old vehicles. Economic growth with many older vehicles on the road will result in sharply higher vehicle replacement demand over the next few years and the company is favorably positioned to benefit from it.

Encouraging numbers from Europe
Ford's European operations reported negative operating margins in the recent past, but the company recently reported encouraging numbers in a press release which indicate improvement. Ford's 6.6% growth outpaced the total industrial growth of 4.2% in Europe as its market share increased by 0.2% to hit 7.9%. It is evident that the company's European operations will soon return to profitability.

Ford continues to gain market share in China
Ford also continues to gain ground in China. The company expects to achieve its target market share of 6% by 2015. In China, the company achieved year-over-year sales growth of 32% to 93,323 vehicles during the month of May, which followed 29% year-over-year growth in April and a 28% increase in March. Ford has sold around 461,473 vehicles in the first five months of the year, an increase of 39% year to date. Sales of Ford's Mondeo model in China surged by approximately 90% to 10,395 vehicles, while sales of Ford Focus cars increased by 22% to 33,341 units.

The company's passenger car sales in China were up 46% compared to the same period last year and Changan Ford automobile sales surged by 32% compared to the first five months of 2013. Later this year, Ford is also rolling out its Lincoln luxury brand in China. Ford expects Lincoln to perform better in Asia than it has been performing locally. The company is laying out a firm foundation for continued strength in Asia (mainly China), with three new plants opening in China. Though the company documented strong results in the local market, there is no doubt that China presents one of the most attractive markets for Ford in the future, with the company achieving double-digit sales growth.

Foolish takeaway
Ford is investing heavily in its future, rolling out new models, and gaining market share in China. The company had a volatile first few months of 2014 but sales are recovering. More importantly the company's sales continue to improve in the crucial Chinese market.

The Europe segment, which has been challenging since the 2008 crisis, is also showing promising results. Finally, the company's sales should also benefit from replacement demand and the introduction of new lighter-weight vehicles.

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  • Report this Comment On July 01, 2014, at 9:22 AM, ohiodale wrote:

    Why buy a Ford today when the new revamped models will be out in a couple of months.

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Jan-e- Alam

Jan-e-Alam writes mostly for the Motley Fool energy and materials sector. He has been writing for several financial media websites for a few years now and other than materials/energy sector also covers financials and industrials. He holds an undergraduate degree from Loughborough University and is a CFA Level III Candidate. He has also worked for a bulge bracket bank in the past.

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