Ford's Economies of Scale and the Three F's
In this article, let's take a look at Ford Motor Co. (F), the second-largest U.S. producer of cars and trucks. The stock is trading between its 52-week price range (about 14% above the minimum and 16% below the peak), so this makes investors show increased interest as price nears either the high or the low.
Ford operates in a very cyclical auto industry, characterized by a very important competition. For the next years, the big challenge for the firm is increasing market share, but this will not be easy, because Ford operates in highly competitive markets. In addition, China and India's automakers are increasing the market share by adopting cost leadership strategies. The evolution of market share in the U.S. and Europe remain relatively stable.
For the first quarter, market share for the automotive sector can be disaggregated this way:
2014 Q1 | 2015 Q1 | |
U.S. | 15,30% | 14,70% |
Brazil | 9,20% | 10,50% |
Europe | 7,20% | 7,80% |
MIDDLE EAST & AFRICA | 4,30% | 4,30% |
ASIA PACIFIC | 3,40% | 3,40% |
Moreover, quality is becoming an important competitive issue in the industry and Ford shows the ability to meet consumers' requirements. So far this year, three out of 15 planned global new product launches were completed and remains the challenge for the rest of the year.
If I have to sum up the company�s performance in the first quarter, I would say it had a relatively good start with operating results in line with expectations. Although the company has achieved its 23rd consecutive quarter of pre-tax profit, the volume of sales was down by 1% and revenue was down by 6% from a year ago, due to the effects of major product launches and the U.S. dollar strength. Automotive revenue by segment in the first quarter was: North America -2% to $20 billion, South America -20% to $1.5 billion, Europe -11% to $6.9 billion, Middle East & Africa $1.1 billion, Asia Pacific -14% to $2.3 billion.
Now, let�s compare the U.S. sales in a year-to-date basis:
Sales by Brand | 2015 | % | 2014 | % | % Change 2015/2014 |
Ford | 1.029.188 | 96% | 1.010.717 | 96% | 1,8% |
Lincoln | 38.786 | 4% | 37.251 | 4% | 4,1% |
Total | 1.067.974 | 100% | 1.047.968 | 100% | 1,9% |
Sales byType | 2015 | % | 2014 | % | % Change 2015/2014 |
Cars | 351.512 | 33% | 356.776 | 34% | -1,5% |
Utilities | 321.753 | 30% | 311.579 | 30% | 3,3% |
Trucks | 394.709 | 37% | 379.613 | 36% | 4,0% |
Total | 1.067.974 | 100% | 1.047.968 | 100% | 1,9% |
Source: Company�s report
Ford's total U.S. sales of 1,067,974 vehicles year to date has increased by 1.9% from a year ago.For 2015, Ford expects higher revenue, operating margin and cash flows, compared with 2014. But I would like to be direct on one point. To increase the stock price, Ford must first increase its sales in the rest of the year. Looking at the table above, we can appreciate that the growth so far was very small (almost 2%) but in the same period the stock price achieved a negative return of 2.1%. In my opinion, even though the company grows its sales in the rest of 2015, I think there is not much space for a considerable growth in the share price. Considering a five-year period the price appreciation was at 14.7% compound annual growth rate.
Then, why may people be interested in investing in Ford?
The company reinstated its dividend policy in 2012, and the automaker has an attractive dividend policy, a 44.2% CAGR in a three-year period, which shows its commitment to return cash to investors as it generates healthy cash flow on a regular basis.
Ticker | F | GM | TM |
Company | Ford | General Motors | Toyota Motor |
DividendYield | 4% | 4% | 1,9% |
Dividend yield is an important aspect of income investing and is one thing that investors should look for when selecting equities with a high dividend yield. Ford�s dividend yield is close to a five-year high, yielding 4%, -as well as General Motors (GM), which I think is good to protect investors' purchasing power, especially considering the consistency of track-record dividends payments and favorable expectations regarding dividend growth for the next years. The dividend yield is one of the highest among its peers, which partially explains the attractive of this investment option. Toyota (TM) is not so attractive considering this variable.
The company focuses on economic efficiency from carrying out production on a larger scale, better named as economies of scale. For next year, the company expects almost all of its production to be generated in nine core platforms, trying to get a faster production while reducing costs. B and C segments involve more than 2 million units of annual volume, so cutting costs will save billions of dollars to the company.
Ford's prospects for the future are auspicious; revenue of the new F-150 pick-up should boost company�s revenue. The Ford and Lincoln brands are key products for achieving a good performance. Models such as Fiesta, Focus, and Fusion have good market acceptance. Further, I think the switch from trucks to small cars will be good in the future. On the other hand, the luxury category Lincolns will make more profit than other Ford brand vehicles due to four new vehicles in the next four years.
Final Comment
Since 1956, investors have been buying stock in Ford Motor Company. With the economic recovery, customers are returning to buy the company�s products due to its higher quality. We believe this company has strong competitive advantages.
According to Yahoo! (YHOO) Finance, the estimated one-year target share price is $ 17.35, so if you buy shares at current market price ($15.29), your return from price appreciation would be 13.5%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $0.6 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 4%. So the total expected return for investing in Ford is 17.5%, which we believe is an attractive stock return.
I think there are some important risks, like a lower acceptance of new products or an increase in volatility of fuel prices. Moreover, industry sales volume could be hurt by recession in principal markets. In the past years, the company could not achieve growth in market share, and I don�t think this will happen this year. In my opinion, the only way to incorporate this stock to a portfolio is for one reason: dividend yield. It is fair to say that it would be a good choice for dividend investors.
The fact that Richard S. Pzena has upped its stake in Q1 by 18% to 17.64 million shares, valued at $284.66 million, appears to be in line with analyst's opinions. Although Mr. Pzena is the major shareholder of the company�s shares and continues to grow his stake, I would not recommend buying this stock based only in future price appreciation.
Jim Simons (Trades, Portfolio) have initiated a new position of 1,546,509 shares, while David Dreman (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have added the stock in the first quarter, as well as HOTCHKIS & WILEY, NWQ Managers (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).
This article first appeared on GuruFocus.
