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Lower Fair Value, but Still Upside for Ford Shares

Weak international results from South America and elsewhere are weighing, but we still see opportunity in the firm, writes Morningstar’s Dave Whiston.

Although

We think Ford had a strong quarter because automotive revenue grew 9.1% from the prior year's quarter to beat consensus by about $700 million despite the strong dollar, while automotive operating margin increased by 400 basis points to 6.5%. Furthermore, although South America still lost $163 million in the quarter, the slight improvement from a $170 million loss in the prior year’s quarter despite severe inflation and currency pressure suggests upside to the region once industry volumes finally recover. The new Ka has been doing well for the company and helped Ford increase share in South America by 140 basis points to 10.2%. Ford Europe narrowed its loss to $182 million from $439 million in the prior year’s quarter as volume and pricing gains more than offset headwinds from currency and Russia. Management thinks it may have a record fourth quarter in Asia-Pacific thanks to new model launches and still expects the region to grow full-year pretax profit in 2015. It will be a huge quarter to meet this guidance as segment income year to date is down 36%.

North America drove results with a record quarterly profit and operating margin rising 420 basis points from the prior year’s quarter to 11.3%. A 30 bps market share increase plus mix and pricing tailwinds of about $950 million and the nonrecurrence of a large warranty charge last year helped offset significant fixed and variable cost increases. Management now expects to be at the high end of its full-year segment margin guidance of 8.5%-9.5%. Actual margin through the first nine months was 9.9%.

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About the Author

David Whiston

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007.

Before Morningstar, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner. In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011.

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