The second largest auto maker of the U.S. and fifth biggest automaker of the world, Ford Motor Co. (NYSE:F) is on a roll. Ford is expecting significant growth in China. The company has been going strong in Europe where it has recently reported solid growth of 8.8% for the month of January, the best figures among the Detroit automakers. Meanwhile, the company has been witnessing higher production volume in North America, where its profits were higher than market’s expectations.
In its previous results for the fourth quarter, Ford reported better than expected earnings and revenues, largely due to the improved performance in North America and Asia. For 2014, the company has reaffirmed its guidance. However, the intensely competitive environment and downward pressure on prices can have an adverse impact on its profits.
- Warning! GuruFocus has detected 5 Warning Signs with F. Click here to check it out.
- F 15-Year Financial Data
- The intrinsic value of F
- Peter Lynch Chart of F
In its quarterly results, Ford’s net income jumped 90% from last year to $3.04 billion, or $0.74 per share. This massive increase, however, was largely due to a tax benefit in Europe as its pretax profit dropped by 24% to $1.28 billion. Despite the drop, the adjusted earnings came in at $0.31 per share, this was better than analyst’s estimate of $0.28 per share.
Ford’s quarterly revenues rose 3.6% from the same quarter last year to $37.6 billion. The revenues were also higher than market’s expectation of $35.17 billion. This growth in revenue was mainly due to the increase net pricing, a favorable mix and a rise in production volume.
During the quarter, Ford’s output rose by 79,000 units, or 5%, from a year earlier to 1.6 million units. Ford’s management has attributed this increase to higher market share in North America and Asia Pacific and an across the board increase in industry volumes in all regions.
Considerable Growth In China
Compared to the industry titan General Motors (NYSE:GM), Ford is a very small player in China’s enormous market. General Motors is the second biggest foreign automaker in China, behind Germany’s Volkswagen (VLKAY). The company, however, is eying significant growth in the current year after it witnessed an impressive 49% growth in the Chinese market in 2013.
For the current year, Ford says that its growth in China will surpass that of the country’s auto industry. The company is targeting sales of more than 1 million vehicles in the current year. Ford sold 935,813 vehicles in China in 2013.
In 2013, Ford and other American automakers capitalized on anti-Japanese sentiments stemming from the islands dispute between China and Japan. Following the dispute, the Chinese consumers cut back on the purchase of vehicles manufactured by Japanese automakers, such as Honda (NYSE:HMC), Toyota (NYSE:TM) and Nissan (NSANY). This coincided with Ford’s ambitious Chinese expansion plan which has been going on since 2011. As a result, the company benefitted from rapid year-over-year increase in sales.
Improvements in Europe
Moreover, Ford has been reporting better numbers from Europe which indicates that the company’s turnaround efforts in the continent are bearing fruit. For the month on January, Ford witnessed an 8.8% increase in sales in Europe, which was the highest number among the Detroit automakers. According to Ford, this growth was led by a 38% increase in sales in Germany.
These impressive European numbers were a follow-up to its quarterly performance in which Ford’s losses in Europe dropped to $571 million from $732 million in the prior year. Although Ford’s quarterly volume in Europe dropped by 3%, it looks on track towards recovery in this continent which is still recovering from debt and political crisis.
The company has been keeping a tight lid on its costs and has been trying to match production with demand trends. This was the main reason behind the closure of the Romanian plant for four days earlier this month.
Similarly in North America, Ford has been strictly monitoring its inventory levels. Here, Ford will introduce around 16 new models in the current year.
In this market, Ford has suffered with declining profits due to intense competition which caused a decline in vehicle prices. Moreover, the increasing input costs also had an adverse impact on income. In its previous quarterly results, Ford reported a $170 million drop in income from operations from North America to $1.7 billion.
Despite the drop, the business reported slight improvements in volume and revenues in North America. Moreover, Ford delivered better than expected results as Ford’s income was better than analysts’ estimates. RBC Capital and Barclays had predicted profits of $1.5 billion and $1.43 billion respectively.
Overall, Ford has delivered a better performance than most of its rivals, including General Motors. Ford will continue to grow strongly in China on the back of its expansion plan. The company has significantly reduced its losses in Europe. In North America, Ford has reported strong sales and, according to industry experts, is better at inventory management than its peers.
Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.