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Ford Motor Stays Neutral

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On Jul 25, we maintained our Neutral recommendation on Ford Motor Co. (F - Free Report) . We appreciate the company’s higher profits in the second quarter of 2013 and expectation of higher market share in the U.S and better pre-tax operating profit in 2013. However, we are concerned about its higher structural costs and economic weakness around the world, particularly in Europe.

Why the Reiteration?

On Jul 23, Ford posted an impressive 50% rise in earnings per share to 45 cents in the second quarter of 2013 from 30 cents in the same quarter of 2012 (all excluding special items). With this, earnings outpaced the Zacks Consensus Estimate of 37 cents.

Revenues in the quarter increased 14.4% to $38.1 billion, exceeding the Zacks Consensus Estimate of $35.4 billion. The improvement was attributable to increased wholesale volumes in automotive business and higher market share in all the regions.

Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 increased 6.2% to $1.54 per share. Meanwhile, the Zacks Consensus Estimate for fiscal 2014 rose 2.9% to $1.77 per share.

The automaker’s business in all the geographic regions improved during the quarter, with European and South American businesses showing marked improvement owing to the One Ford plan.

The company is expanding its footprint in the emerging global markets including Argentina, Brazil, China, India and Thailand. Ford expects 70% of its global expansion to be in Asia, primarily China and India, and account for 40% of its vehicle sales in four to five years.

Ford anticipates that the investments will eventually bear fruit with a 50% improvement in sales to 8 million vehicles in 2015. Small-car sales, as a percentage of total sales, are expected to go up to 55% by 2020 from the current level of 48%.

Ford continues to benefit from the product transformation plan “One Ford,” Ford has already renewed 70% of its product line-up and has planned several new launches under the “One Ford” plan. Ford plans to launch 6 new Lincoln models in the next 3 years, including a small car in 2014. It also plans to roll out as many as 20 new models in Europe over the next three years to boost car sales in the continent. The company intends to triple its lineup in China by introducing 15 models, including the Kuga small sport utility vehicle by 2015.

However, rising commodity and structural costs for replacing older vehicles with new models may mar the company’s results. In addition, pension and healthcare benefits to the company’s employees are some of the major issues concerning Ford’s profitability amid the current competitive environment in the industry.

Other Stocks to Look For

Some stocks that are performing well in the automotive industry include Visteon Corp. (VC - Free Report) , Gentex Corp. (GNTX - Free Report) and American Axle and Manufacturing Inc. (AXL - Free Report) . Both Visteon and Gentex retain a Zacks Rank #1 (Strong Buy), while American Axle holds a Zacks Rank #2 (Buy).

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