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Can Ford Motor Company (F) Continue to Create Shareholder Value?

Ford Motor Company (NYSE:F)Ford Motor Company (NYSE:F) is still far from being given its due. With an increasing demand for automobiles in North America and Ford Motor Company (NYSE:F)’s expansion plans in the Asia Pacific (particularly China) region, the company is definitely on a roll. Let us have a look at some of the key positives that will continue to create shareholder value. The current undervaluation bolsters the case for buying Ford now.

Company overview

Ford Motor Company (NYSE:F) is involved in the development, manufacture, distribution, and service of vehicles, parts, and accessories. It operates in two areas: automobiles and financial services. The automobile sector offers vehicles under two brands, Ford and Lincoln. The financial sector provides automotive financing products, which include retail installment sale contracts for new and used vehicles, leases for new vehicles, etc.

Geographical spread

The company markets cars, trucks, parts, and accessories in different parts of the world through its retail dealers. North America is the biggest contributor to its revenue, followed by Europe.

Financial insight

Ford Motor Company (NYSE:F)’s revenue declined 1% in fiscal 2012. This was primarily due to the global economic slowdown to 2.5% growth in 2011 as compared to 4% in 2010. The Eurozone crisis also negatively impacted revenue growth. Amidst a slowdown and decline in revenue, the decline in EBITDA margin was marginal at 100 basis points for 2012.

In terms of cash-flow metrics, a positive operating cash flow and free cash flow enhance the liquidity position and also support the working capital requirements. High capital spending in fiscal 2012 and the first quarter of 2013 shows the company is aggressively improving the model mix and accelerating the development of new products, which the customers demand. High capital expenditures will translate into future revenue growth.

Overall, the fundamentals look healthy with steady revenue and EBITDA margin, positive cash flow and significant investments for future growth.

$millions 2012 2011 2010 2009 1Q13 1Q12
Revenue 134252 136264 128954 116283 35810 32445
Growth in revenue -1% 6% 11% 225% 10%
EBITDA 16752 17368 18669 16785 1774 1707
EBITDA Margin 12% 13% 14% 14% 5% 5%
Net Income 5665 20213 6561 2717 1611 1396
OCF 9045 9784 11477 15477 211 2075
Capital expenditure 5488 4293 4092 4059 1483 1093
FCF 3557 5491 7385 11418 -1272 982
Debt 109258 99531 104019 131673 107356 105058
Equity 15947 15028 -673 7820 17638 15989

Key investment positives

Innovation leader

Ford Motor Company (NYSE:F) has been issued 661 U.S utility patents in fiscal 2012 as compared to 444 in 2011. This increase in the number of patents is an indication of continued technological innovation, which will boost growth in the future. An important innovation to mention here is the set up of Changan Ford Engine Plant (CAFEP) which would raise engine production capacity by 400,000 units per year. Besides this, there are number of other innovations in the company’s kitty, which qualifies it to succeed in changing environment and satisfy the need of the investor.

Changing geographical mix

The company is focusing on high-growth countries like China, Russia, and Turkey, where the company expects to exceed overall industry growth.

An estimated increase in sales from 15% to 32% in the Asia Pacific and African regions is primarily because of increasing demand in China coming from rising incomes, a growing middle class and supportive industrial policies from the Chinese government. Moreover, the growth potential is expected to be high since per-capita car ownership is still low at 4.8%.

Ford Motor Company (NYSE:F)’s focus on changing the geographical mix and focusing on the Asia Pacific region is evident by the setup of Changan Ford Engine Plant (CAEFP) in China, which would more than double China’s engine production capacity. In line with the strategy of changing its geographical sales and production volumes, the company plans to close two U.K facilities in 2013. This will reduce vehicle assembly by 18%, leading to gross annual savings ranging between $450 million to $500 million.

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