Ford Motor Co.'s (F, Financial) investment strategy could boost its long-term financial performance, leading to a successful stock price recovery.
The automaker is investing in smart technology that could improve its competitive position, including autonomous vehicles, battery power and a range of new products. It is also seeking to rationalize its existing structure.
While the stock has declined 6% versus a rise of 6% for the S&P 500 in the last year, the company’s valuation suggests it could offer good value.
Technology focus
Ford’s increasing focus on smart vehicles could enhance its competitive advantage. The company is equipping all vehicles sold in the U.S. with modems so car owners can connect to LTE hot spots. By 2020, 90% of its vehicles sold globally will also include modems. The company will leverage the connectivity that modems provide in order to improve its vehicles as well as the services it offers.
As part of this initiative, it has entered a partnership with Amazon (AMZN, Financial) for its Transportation Mobility Cloud to be powered by Amazon Web Services. This is expected to expand the availability of cloud connectivity services and connected car application development services across the transportation industry.
The launch of FordPass rewards, the company’s new loyalty program and app, has proven to be popular among customers. The app offers a variety of features, such as being able to lock or unlock a vehicle from any location. The app is expected to enhance the customer experience and may boost brand loyalty.
Investments are also being focused on the development of the company’s autonomous vehicles. Ford expects to deploy to a third city for business operations later in the year. Its Argo artificial intelligence project has received a license to test autonomous vehicles in California, which could improve the prospect of it releasing driverless vehicles over the medium term.
New products
The company’s financial performance is expected to benefit from the release of a number of new products. In the U.S., the launch of the Ranger, Explorer and Escape products is expected to contribute to the replacement of 75% of its current product lineup by 2020. The company is also expanding the production capacity of popular models, such as the Expedition and Navigator, while reducing production of lower-margin and less popular vehicles.
Ford also plans to expand its battery electric capacity at a time when demand for hybrid and all-electric vehicles is rising in many of its key markets. As part of this initiative, the company recently invested in electric carmaker Rivian. The two companies will work together on a new Ford-branded electric vehicle based on Rivian’s vehicle platform. The automaker is also working on a battery-powered version of its popular F-150 pickup truck, which may resonate with customers.
Threats
The company’s performance in the most recent quarter was disappointing as revenue declined and market share shrank. This fits in with the wider trend in U.S. auto sales, which declined in April following a challenging first quarter. Consumers are being squeezed by higher vehicle prices as well as rising borrowing costs. Volumes have also been lower in China’s auto market, declining for nine months in a row as the wider retail sector has experienced a challenging period.
In response, Ford is seeking to reorganize its cost structure. In South America, for example, it is moving toward a more asset-light business model by closing its facility in Sao Bernardo. It is also redesigning its European business by discontinuing loss-making product lines and adjusting its manufacturing footprint. The company is also moving ahead with plans to focus on higher-margin products, which are expected to offset the prospect of lower volumes across its product range.
Outlook
In 2020, Ford’s earnings per share are expected to grow 1%. Despite this, its price-earnings ratio of 13 suggests it offers good value given the growth potential it has over the long term.
The company’s focus on investing in new technology could improve the customer experience. Likewise, investments in new products, battery power and autonomous vehicle development may improve its competitive advantage over the long run.
Although auto sales in key markets such as the U.S. and China may remain subdued in the near term, the stock could deliver a successful turnaround after underperforming the S&P 500 in the last year.
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