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Russia's Contribution to Ford's Stock Value
Ford Motor Co. ( F ) reported 2010 full year net income of $6.6 billion, its highest in more than 10 years. In 2010, Ford's International operations (outside North America) contributed 46% to its total automotive sales of $119.3 billion. We estimate that Ford's international operations contribute 35% to its stock value - about the same as its North American operations (both cars and trucks). We expect that International operations will become increasingly valuable for Ford as it competes with other auto manufacturers like BMW (GR:BMW), GM ( GM ), Daimler (ETR:DAI), Audi ( GR ), Honda ( HMC ), Toyota ( TM ) and others.
We maintain a Ford stock price estimate of $20.59, which implies a 45% premium to market price.
Here we take a closer look at the opportunities for Ford in Russia.
Russian Automotive Industry
In Russia, the total industry sales volume of vehicles was about 2 million units in 2010 - an increase of 31% from 2009, largely due to government stimulus. Before that, industry sales volumes had fallen nearly 50% in 2009 as a result of the economic crisis.
Within Europe, Russia is becoming an increasingly important market for Ford. In 2010, Ford's net sales revenue in Russia hit $2.04 billion (5.6% of Ford's total European net sales revenues). This marked a 30% increase from 2009 levels, even though net sales revenues decreased by 5% overall for the entire European region (including Russia and Turkey) during the same period. Despite this encouraging growth, Ford's market share in Russia actually declined by about 1% in 2010, to 4.6%.
New Automotive Industrial Regime to Aid Auto Market Growth
Russia introduced a new automotive industrial regime in February 2011 to lower import duties on automotive components for the next eight years for qualified automotive manufacturers. The qualification criteria in order to participate in this regime are:
- Assembly capacity of 350,000 vehicles annually within the next three years.
- Substantial localization of component supply, including engines, stampings and other components.
- Establishment of a research and development center.
Ford, together with its proposed Russian joint venture partner, has already submitted an application to qualify for the reduced import duties. Once accepted, this will enable Ford to offer competitive pricing for its products and drive sales growth.
Significant and Sustained Growth in Russia
We expect industry sales volumes in Russia to grow rapidly over our forecast horizon. Ford's management noted that Russian industry sales volumes could even exceed that of Germany, Europe's largest market. Germany's industry sales volume was 3.2 million units in 2010, a decline of around 21% from its 2009 levels.
In 2008, nearly 4% of Ford's company-wide net sales revenues came from its Russian operations. However this number dropped below 2% in 2010. We believe that Russia's contribution to Ford's total net sales could recover towards 2008 levels in the mid-term.
Strength in Russia should help Ford grow its international market share. To illustrate the company's stock value sensitivity to this metric, we estimate that a 1% increase over our base case estimates would imply a 4% upside to our $20.59 price estimate for Ford stock. You can test this assumption, and others, by dragging the trend line in the interactive chart above.