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Looking Beyond Ford's Short-Term Weakness

August 04, 2014 | About:
jaggom

jaggom

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Ford (F) had released disappointing results earlier this year. The stock was performing well on the stock market, but has dipped slightly of late. The company’s profit has been hurt by higher warranty costs and losses due to currency devaluation in South America. Ford's earnings also declined as compared to last year. But, Ford is undertaking strategies for a strong comeback in the future.

The problems

Ford’s earnings fell as a result of higher warranty costs and devaluation of currency. Further, the company’s profit fell by a disappointing 39% in the first quarter. Though Ford saw an increase in sales worldwide, including markets in Asia and Europe, yet the weakness in the North American market hurt its profit. But, Ford is working on various strategies to make a strong comeback and gain market share.

Ford is aggressively restructuring the business to operate profitably in the current demand environment and is changing the model mix. It is innovating its product line to add more value to its products.

Ford is launching 23 new products worldwide, which should help it in improving its position in the market. Further, the company’s expansion of the Ford EcoSport to Thailand is another positive.

But, due to stiff competition from peers, even this might not be enough for Ford. Higher incentives by peers such as GM have hurt sales of Ford’s products. Also, 22 million recalls from Ford in the past might scare a few customers away. So, the company might face challenges in growing it sales in such a competitive environment.

New markets will drive growth

Given the competition in the domestic market, Ford is focusing on the Asia-Pacific. The company can expect an increase in sales in the future as Ford’s vehicles have seen good response in these markets. But, the automaker might see weakness in China as Chinese economic growth is expected to be slightly below 7.5% with several challenges, including excess capacity and excess debt.

Moving on to India, Ford is convinced about a good performance in this region. It expects a solid 5% improvement in the Indian market in the future. On the European front, the auto maker is expecting better results as it expects the GDP to improve by 1%.

Also, Ford is adopting a restructuring strategy to improve its operations. It plans to invest $168 million at its Ohio Assembly plant for the production of the all new 2016 F-650 and F-750 medium-duty trucks. Also, Ford has announced an investment of $580 million in additional 650 jobs to build a new 2.7-liter EcoBoost engine at the Lima Engine Plant in Ohio to increase the production of Super Duty and Kentucky trucks.

Some concerns

But, Ford is worried about the South American market due to unclear economic policies. With the slowing economy in Brazil due to inflation, Ford is expecting weakness. On the other hand, in Argentina and Venezuela, the volatile situation is forcing the company to consider other markets to improve profitability.

Also, Ford is facing certain challenges regarding the quality of its vehicles. The company has recalled 14.7 million vehicles through 159 campaigns. This is turning out to be a bad PR exercise for the company. It has been reported by Bloomberg that about a third of all recalled cars and trucks don’t get repaired. Moreover, one out of every seven vehicles still on the road have an unrepaired defect. This can give Ford’s peers a chance to hurt the company’s sales in the future.

Conclusion

Despite Ford’s woes, many analysts expect the company to do well in the future. Looking at its trailing P/E 9.91, Ford is cheap. So, from an investment point of view, investors looking for long-term gains can go for Ford as its new models can deliver growth going forward.


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