Only on Wall Street could news that Ford (NYSE:F) had posted its best earnings in 13 years drive the stock down nearly 8% shortly after the opening bell. Shares had recovered by midday, but it still seemed slightly twisted that an $8.8 million ($1.51 per share) pre-tax profit for 2011 — $463 million higher than one year earlier — should provoke investors’ wrath.
On the face of it, this should have been the day CEO Alan Mulally was crowned King of Detroit. The venerable Ford had been a veritable multi-car pileup when Mulally took the wheel in 2006. Mulally steered the company around bankruptcy (unlike rivals General Motors (NYSE:GM) and Fiat SpA’s Chrysler), jettisoned distracting brands like Mercury and Land Rover and revamped manufacturing with a new global car platform.
Not to mention little things like three straight years of profitability, over 2 million in sales for the first time since 2007 and registering three-point market share gains over three consecutive years — for the first time since 1970.
But while Friday’s numbers were good, they weren’t nearly as positive as they appeared. In the fourth quarter, Ford used $12.4 billion worth of tax credits it accumulated five years ago to boost its fortunes. It won’t be able to repeat that in 2012, and without that very “special item,” its profit was only $1.1 billion (20 cents per share), missing the Street’s expectations by five cents.
And those missed expectations planted a huge speed bump smack in the middle of Mulally’s happy day. Although a nickel doesn’t seem like much, it does illustrate the market’s apparent disconnect between perception and performance.
Consider that just three years ago this week, F shares were trading at a paltry $1.97; during the next 12 months, they rose a whopping 480% to $11.55. Between January 2010 and January 2011, the stock grew another 60% to $18.79.
But in the past year, as the automaker’s sales and balance sheet have continued to strengthen, its stock has foundered. Between January and October 2011, Ford’s share price fell more than 50%. It has recovered about half of that lost ground, but Ford shares still are stuck in the mid-$12 mud.
Why? Ford shares lack buoyancy right now for two reasons: motion sickness and big potholes on the road ahead. Despite a trailing P/E of just 6.4, F shares are trading 530% higher today than they were on Jan. 27, 2009. That breakneck speed is making investors — who saw the stock hit a brick wall at high speed in 2009 — a little queasy.
Still, market perception is seldom completely wrong, and the unexpected ill wind blowing through Ford’s Dearborn, Mich., headquarters now is based at least in part on these three deep — and potentially dangerous — potholes on the road ahead:
- Europe and Asia Troubles. Europe’s debt crisis and challenges in Asia ate Ford’s lunch last year and a full recovery in either region is unlikely in 2012. Ford’s Europe operations lost $190 million in the fourth quarter and $27 million for the full year, compared to a $51 million loss for Q4 2010 and a $182 million profit for the full fiscal year. Thai flooding and softer sales swung Ford’s 2010 fourth quarter and full-year earnings in the region from $23 million and $189 million profit to losses of $82 million and $92 million respectively.
- Higher Operating Costs. Including hedging, Ford’s commodity costs were $2.3 billion higher than expected in 2011. The company’s structural costs were $1.4 billion higher last year than the company projected. Those are big reasons Ford’s margins slipped from 6.1% in 2010 to 5.4% last year. Ford’s structural costs could increase by as much as $2 billion next year, although Ford believes it still can drive margin improvement.
- Hotter Competition. Ford benefited from Toyota’s (NYSE:TM) and Honda’s (NYSE:HMC) production challenges in 2011. The earthquake, tsunami and nuclear disaster in Japan last March pummeled TM and HMC, who also were hit harder by supply chain disruptions stemming from flooding in Thailand. But the two automakers are poised get up off the mat this year. And the other two members of Detroit’s automotive troika — GM and Chrysler — might pose an even bigger competitive threat. GM took over as the top global vehicle manufacturer last year with sales of more than 9 million, while Chrysler’s sales grew 26% in 2011.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.