Hitch A Ride With Ford On The Path To Profits

by Tony Daltorio, Investment U Research
Wednesday, March 10, 2010

Ford Motor Company (NYSE: F) just celebrated its first annual profit since 2005. After losing $6.9 billion in 2008, the automaker reported a full-year net profit of $2.7 billion.

Initially expecting further losses, CEO Alan Mulally warned that his company wouldn’t be “solidly profitable” before 2011. Yet it gained last year all the same, and without any sort of Federal bailout.

Quite the contrast to its Detroit rivals, General Motors (NYSE: GM) and Chrysler, which both relied on Uncle Sam while going through bankruptcy last year.

Of course, Ford’s self-sufficiency created a bumpy road ahead. While GM and Chrysler can bask in the stacks of tax-payer funding going forward, Ford has only itself to rely on. And its $34 billion of debt and less-than desirable credit rating doesn’t help.

The company has to put the pedal to the metal in order to keep up with the competition.

Fortunately, it seems Mulally and his team have the situation under control. In addition to soundly beating its rivals, it also gained market share. Just back last month, its sales jumped 43%, marking the first time it outsold GM since 1998.

Ford’s market share should continue rising too, as industry insiders believe it’s working on Detroit’s best product pipeline.

And it also has a new focus on emerging markets – part of a larger business overhaul entitled “One Ford” – which should drive it forward even further.

Switching Gears In Asia

Ford plans to use its family of small cars to aggressively expand into Asia.

After two decades of focusing on sport utility vehicles and pick-up trucks, Mr. Mulally has decided to change direction and concentrate on new, small and mid-size cars. He plans to market them all around the world at around $7,500, since about 40% of Chinese and 70% of Indian consumers buy vehicles marked below that figure.

The company recently revealed a new version of its top-selling Focus. Contrary to past years, only the visible parts of the vehicle will change depending on local regulations and consumer trends. Meanwhile, what actually makes the car move will stay largely the same.

Ford believes the new platform will support up to 10 models around the world, accounting for 2 million annual units by 2012.

The company announced last September that it would use the Fiesta platform to build the Figo – a new small car priced at $8,000 – at its plant in Chennai, India.

It then went on to invest $500 million into the plant to boost production capacity up to 200,000 cars and 250,000 engines.

Ford only sold 40,000 cars in India last year. So obviously, it plans on expanding… big time.

It wants to grow its China market as well, where it sold 440,000 vehicles last year. So it’s re-launching the Fiesta there, as well as opening another plant in Chongqing in 2012.

Yet even with those lofty goals, Ford has even bigger sights on another emerging market…

Brazil In Overdrive

Ford can thank South America for its most recent quarterly results, where it tripled pre-tax profits. And that’s especially true in Brazil, where it has made gains for 24 straight quarters now.

All told, Brazil purchased 3.14 million vehicles last year. That 11% increase over 2008 marked an all-time record for the country. And vehicles sales and production should continue to rise from about 3 million in 2009, to 4.5 million by 2016.

Naturally, with those kinds of gains, car companies have made significant gains in the world’s fifth-largest auto market, even while losing out in more traditional areas.

For its part, Ford sold over 300,000 automobiles last year from its four Brazilian manufacturing plants. That puts it in fourth for sales, after Fiat, Volkswagen and General Motors.

And while Brazil is Ford’s third largest market – after the U.S. and the UK – it’s set to continue growing… a lot. In a country of almost 200 million people, only about 1 in 7 own a car.

To meet that rising demand, Ford has set aside $2.3 billion over the next several years to build up capacity and product development in the South American power house. That kind of funding should pay off nicely in the years ahead, as should the company’s overall strategy.

If the developing markets continue to lead global demand in this way, Mr. Mulally is probably right about his company making regular, solid profits as of next year.

Good investing,

Tony Daltorio