Jenny Lin, Ford Motor Company (NYSE:F)’s senior U.S. economist, excitedly announced an 18% jump in Ford’s April sales. The announcement follows on the heels of an impressive first-quarter earnings report. Ford’s Q1 2013 earnings reveal a company that is ideally situated to take advantage of expected acceleration in the U.S. and Chinese auto sales through 2015.
Ford’s Q1 2013 results
Ford Motor Company (NYSE:F)’s first-quarter pre-tax profits of $2.1 billion were $147 million lower than pre-tax profits in Q1 2012, but despite the decrease in profits, the stock price has increased since earnings were released. The market’s positive reaction to Ford’s earnings reflects optimism about the company’s growth prospects in the growing North American and Asian regions.
The Q1 results included a record $2.4 billion pre-tax profit on operations in North America, including a double-digit operating margin and an increase in market share against its competitors. Also positive, though less financially significant, was the company’s result in the “Asia Pacific Africa” regional market, where Ford Motor Company (NYSE:F) earned a promising $6 million from operations while growing its market share by 30%. The company’s overall decline in profit stemmed from unfavorable exchange rate fluctuations in South America and high losses in Europe following the implementation of Ford’s October 2012 European transformation plan.
Ford Motor Company (NYSE:F)’s successes in North America and Asia place it in a strong position to take advantage of macroeconomic trends in the auto industry over the next two years.
In 2012, the average age of vehicles in the U.S. reached an all-time high of 11 years, as consumers were reluctant to make large capital expenditures in the midst of high unemployment and stagnant economic growth. Though U.S. auto sales have trended upwards in the last three years and are expected to surpass 15 million in 2013, sales have yet to reach the pre-crisis levels of 2006 and 2007 when annual sales were in excess of 16 million.
The prevailing sub-peak sales figures along with the record high average vehicle age strongly suggest considerable pent up demand in the U.S. auto market. Analysts expect this pent up demand to be relieved in the coming years, resulting in substantial sales increases, with new car sales rising to pre-crisis sales figures by 2015.
Similarly, expected growth in the Chinese market, of which Ford Motor Company (NYSE:F) currently controls only 3.6%, presents an exciting possibility for the company. After posting weak sales figures in 2012, China, the world’s largest auto market, is expected to experience a 7% increase in vehicle sales in 2013. With Japanese car manufacturers struggling in China due to political disputes for which no resolution is imminent, increased Chinese demand presents an opportunity for Ford to appreciably improve on its 2012 performance in the growing market. Ford’s Q1 2013 results in the region represent a positive step in this direction.
The most pressing threat to Ford’s ability to profit from the expected growth in demand for cars in North America and Asia is a possible resurgence of Japanese manufacturers in those markets. Prime Minister Shinzo Abe’s package of economic reforms, known as “Abenomics”, has had the effect of devaluing the yen by 20% against the U.S. dollar since November 2012.
A devalued yen gives Japanese car-makers, most importantly Toyota Motor Corporation (ADR) (NYSE:TM), the world’s largest auto maker, a price advantage over Ford among price-conscious consumers. Toyota Motor Corporation (ADR) (NYSE:TM) has already begun profiting from the yen’s depreciation; its recent earnings report showed a 159% increase in quarterly net profit.