Ford Motor Co.’s (F, Financial) 3% decline over the past year could present a buying opportunity for value investors.
The auto manufacturer is investing in its international growth opportunities and new technology to improve its competitive position.
Its low valuation suggests that it offers good value for money.
International growth opportunities
The company is making changes to its international operations that could catalyze its financial performance. For example, in Europe, it is restructuring its business and focusing on growing its commercial vehicle segment. It is also reducing the size of its passenger vehicle business to concentrate on market sectors that offer higher margins.
In addition, Ford is reducing its costs across key international markets such as China. It is also exiting unprofitable business segments, such as its heavy truck division in South America. This could provide it with a larger amount of capital that it can reinvest into faster-growing segments.
The Detroit-based company reached an agreement with Indian engineering company Mahindra in the third quarter. The two companies will work together to produce products that are specifically targeted at the rapidly-growing Indian automotive market. Since it is estimated that a third of all vehicles globally will be sold in emerging markets such as India by 2024, Ford’s investment in the Asian country could help it to capitalize on rising demand from Indian consumers who are forecasted to experience fast-paced growth in their incomes over the long run.
New technology
The company is investing in new technology like connected vehicle services. This is where its vehicles have internet access. They can communicate with other internet-enabled devices, such as smartphones, to improve the customer experience. This may lead to higher recurring revenue for Ford as it offers an increasingly wide range of services that use subscription-based charging.
In addition, Ford is investing in its mobility services division, Spin, which is an electric scooter service that consumers typically use for short journeys. It operates in over 60 markets and could become increasingly popular among environmentally-conscious consumers. The automaker is also investing in its self-driving vehicle division. It plans to launch a self-driving vehicle service in 2021 following a period of testing. This may diversify its business model and boost its financial performance over the long run.
Potential threats
The company’s third-quarter update included a change to its guidance for the 2019 fiscal year. Ford lowered its profit guidance range by 7% on the back of weaker-than-expected performance in China that could continue in 2020. The business is also experiencing higher-than-expected repair costs associated with warranties on its older vehicles. They may continue to negatively impact its profitability in the short term.
In response, the business is taking action to improve the durability and long-term quality of its vehicles. For example, it has centralized its engineering function and invested in its testing process.
In addition, it is launching new models that are specifically focused on the needs of Chinese consumers. They could resonate with customers in China and lead to an improving sales performance for Ford in the country. It is also replacing 75% of its North American product line-up by volume by the end of 2020. This could increase the appeal of its vehicles and boost its sales performance.
Outlook
Market analysts forecast Ford will deliver a 6% increase in earnings per share in fiscal 2021. Its forward price-earnings ratio of 7.2 suggests that it has a wide margin of safety.
Disclosure: The author has no positions in any stocks mentioned.
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