We are downgrading our long-term recommendation on Ford Motor Co. ( F ) to Underperform. The global automobile producer is facing challenges from increasing structural and commodity costs and the soft economic backdrop in Europe.
Ford has disappointed by posting a 20% year-over-year decline in profit (to $1.6 billion) in the first quarter of 2012. Including special items, profits declined 45% to $1.4 billion. The decline was attributable to higher tax expenses and lower operating results.
Total revenues slipped 2% year over year to $32.4 billion. The decrease was due to lower wholesale volumes in Europe and Asia.
The company has been replacing its older vehicles with new models to provide customers with smart technology, safety, improved fuel efficiency and high quality standards with 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.
The economic growth in Europe has been hindered by the debt crisis. European countries have been hit by the excessive government debt levels and austerity measures. Ford expects a loss of $500 million to $600 million in its European operations in 2012.
However, 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 would be attributable to Asia, primarily from China and India. It anticipates that the investments will eventually bear fruit with a 50% expansion in sales to 80 million vehicles in 2015.
Michigan-based Ford Motor Co. is divided into two segments: Automotive and Financial services. Its core and affiliated automotive brands include Ford, Lincoln and Mercury. Although the U.S. is Ford's primary selling ground, Europe, South America, and Asia-Pacific constitute its other major markets. Ford competes with General Motors Company ( GM ) and Toyota Motor Corporation ( TM ).
Our recommendation on the stock is backed by a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.