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Ford Upgraded to Neutral

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We have upgraded our long-term recommendation on Ford Motor Co. (F - Free Report) to Neutral. The largest automobile producers is benefiting from its investments in the emerging markets and focus on hybrid vehicles. However, we are concerned about higher structural costs and the economic uncertainties around the world, which may affect the company’s profitability.

Ford is expanding its foothold in the emerging global markets including Argentina, Brazil, China, India and Thailand. The company expects that 70% of its global expansion will be in Asia, primarily China and India. It anticipates that these investments will eventually bear fruit with a 50% improvement in sales to 8 million vehicles in 2015. Small cars sales contribution is expected to go up to 55% of its total sales by 2020 from 48% currently.

Ford’s continuous focus on hybrid vehicles has played a crucial role in its revival since late 2006. The company plans to invest $135 million for its next-generation hybrid-electric vehicles for developing the key components, including advanced battery systems.

It also mulls the introduction of five fuel-efficient hybrid-electric vehicles this year including Focus Electric, C-MAX Hybrid, C-MAX Energi plug-in hybrid, new Fusion Hybrid and Fusion Energi plug-in hybrid. Thus, the company aims to reduce the cost of its current hybrid system along with improving production capacity.

However, the company has been replacing its older vehicles with new models to provide customers with smart technology, outstanding safety, excellent fuel efficiency and high quality standards with greater comfort. This initiative involves an increase in commodity and structural costs. Ford expects a roughly $2 billion increase in its automotive structural costs in 2012.

Ford, in the second quarter of 2012, registered a 39% decline in its profit to $1.20 billion or 30 cents per share from $1.98 billion or 49 cents in the corresponding quarter of 2011. However, the earnings per share surpassed the Zacks Consensus Estimate of 28 cents.

Revenues dipped 6% year over year to $33.3 billion, due to lower operating results in all regions, except North America. However, it exceeded the Zacks Consensus Estimate of $32 billion.

Ford, which competes with Toyota Motor Corporation (TM - Free Report) , maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.

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