Please ensure Javascript is enabled for purposes of website accessibility

1 More Good Reason to Buy Ford Stock

By John Rosevear - Apr 17, 2013 at 2:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A Ford turnaround in Europe could add $2 billion to the company's bottom line in a few years. That's one reason to buy. But there's another story playing out that could be worth another $2 billion or more to Ford. Here's the scoop.

Ford's (F 2.33%) turnaround has been one for the history books. Near collapse in 2006, the automaker borrowed big to finance its own turnaround – and succeeded in remarkable style.

Ford's profits have been strong, especially in its home market in North America. And investors who bought Ford stock in the dark days of 2009 have been richly rewarded.

But even though profits have been strong, the overhaul of Ford isn't a done deal. The company still has a lot of work to do in Europe, and is spending big to finance a huge expansion in Asia.

Last week, I talked about Ford's effort in Europe, and how that effort could add nearly $2 billion to Ford's bottom line in a couple of years. When you consider that Ford made $8 billion before taxes last year, that's a significant gain.

That's one good reason to buy Ford stock. Here's another: It turns out that Ford is winning lot of new fans – in China. And that too should help Ford's bottom line, not to mention the price of Ford's stock.

Huge investments for growth already showing promise
Ford's efforts in Asia probably haven't been reflected in its stock price yet, because so far, the company has mostly broken even in the region. But look a little closer: Ford has broken even in Asia while making massive investments to expand there – some of Ford's biggest investments ever.

Ford CEO Alan Mulally spoke at a groundbreaking ceremony for a new Chinese factory last August. Photo credit: Ford Motor Co.

Ford has already committed almost $5 billion to expand in Asia, much of that in China, where the company is building several new factories. Why China? Because it's now the world's largest auto market. General Motors (GM 2.19%) and Volkswagen (VWAGY 0.76%) are the big leaders in China, but Ford is determined to make a dent in their market shares.

Ford introduced its new Focus in China last spring, and it has turned out to be very popular. Sales in China helped propel the Focus to the top of the worldwide sales charts last year – beating out Toyota (TM 0.27%) and its Corolla, according to research firm R. L. Polk.

But the Focus was just the first in a wave of new Fords set to arrive in China by 2015, many of which will be built in shiny new factories financed by that $5 billion investment. Ford expects that wave to put the company on track to double its market share in China, to 6%, in three years. By 2020, Ford could be selling more vehicles in China than it does here in the U.S., executives have said.

How will that affect the price of Ford stock?

How Asia could add to Ford's bottom line
Here's a back of the envelope calculation to give us some idea of how China could affect Ford's profits, and in turn the price of Ford stock: In 2012, VW made 3.7 billion euros (about $4.9 billion) from its Chinese joint ventures while delivering 2.8 million vehicles.

Ford will be able to build a little over 1.5 million vehicles a year in China by 2015. Ford's profit margins will probably lag VW's somewhat, but given Ford's margins here in the U.S. it's unlikely that they'll be too far behind. So if VW made almost $5 billion on sales of not quite 3 million... we can estimate that Ford could make something in the neighborhood of $2 billion on sales of 1.5 million in 2015.

Obviously, there are a lot of variables that we haven't taken into consideration. The final number could vary wildly from our quick estimate. But a $2 billion addition to Ford's pre-tax earnings would represent a 25% jump over Ford's 2012 profit.

Think that would be a nice driver for the stock price?

Now if Ford does nothing else but end its losses in Europe (which will probably total $2 billion this year) and hold its ground everywhere else, we could be looking at a nearly 50% increase in Ford's pre-tax profits by the end of 2015.

What will that do for the price of Ford stock?

I can't say for sure. But it won't be bad, I'll tell you that.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
$12.71 (2.33%) $0.29
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
$161.03 (0.27%) $0.43
General Motors Company Stock Quote
General Motors Company
$35.98 (2.19%) $0.77
Volkswagen Aktiengesellschaft Stock Quote
Volkswagen Aktiengesellschaft
$19.87 (0.76%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.