By the looks of its second-quarter report, Ford (NYSE:F) has stalled. Earnings dropped by 57% to $1.04 billion, and revenues were off by 6.2% to $33.3 billion. The blow was softened, as investors seemed to already expect this news, and F shares are down just about 1% in midday Wednesday trading.
Nonetheless, it just digs Ford’s hole even deeper for the year. To date, Ford stock has shed more than 30%.
So, should you buy Ford in its extended bargain state, or is Wednesday’s report a sign to steer clear? To see, here’s a look at the pros and cons of Ford stock:
Focused: Ford has streamlined its operations over the years — a process that has included the sale of divisions like Jaguar, Land Rover and Volvo. The remaining brands only include Ford models and its luxury arm, Lincoln. Now, Ford can devote more resources to its primary brands, which should make it more competitive, and the overall cost structure should be reduced.
Labor: In 2007, Ford negotiated a highly favorable collective bargaining agreement with the United Auto Workers labor union. It was key in providing a more palatable cost structure. The contract will remain in effect until 2015 and should help keep a lid on the rapidly increasing healthcare costs.
Leadership: In 2006, Ford hired Alan Mulally as its CEO. He was a former executive at Boeing (NYSE:BA) and had lots of experience turning around complex organizations. Mulally has done a standout job, helping Ford avoid a federal bailout, cutting through the stifling bureaucracy and bolstering the company’s innovation.
World Economy: There’s been a noticeable slowdown across the globe, and that doesn’t help the highly cyclical auto industry, where customers can find ways to put off new purchases. Ford is seeing weakness in Europe as well as South America, and even lost money in Asia in the most recent quarter. Because of this, the company has reduced its estimate for its full-year capital spending budget from $5.5-$6 billion to $5 billion.
Competition: You’ve got General Motors (NYSE:GM) and Chrysler across the street. Volkswagen (PINK:VLKAY) is across the pond. And across that other pond, there’s pressure from Japanese powerhouses Toyota (NYSE:TM), Honda (NYSE:HMC) and Nissan (PINK:NSANY), as well as maturing South Korea firms Kia and Hyundai. Ouch. And all these operators engage in aggressive discounting and promotions to claw up market share, which can put pressure on margins.
Gas Prices: Gas prices have subsided in recent months, but we’re seeing hints that they will rise again soon. Crude supplies are tight, and geopolitical risks still loom. Ford is vulnerable to higher gas prices since it still relies heavily on light-truck sales.
Ford has made great strides. Labor costs are in line with its rivals, and the company continues to benefit from a focused product strategy. The company also has $9.5 billion in net cash.
But Europe still hangs over Ford like a storm cloud. The company will have a tough time restructuring its operations because of the labor laws. In fact, Ford’s chief financial officer, Bob Shanks, said Europe will be a major problem for at least five years. Thus, even as the North American market grows, it will be diluted by Europe.
So should you buy Ford? No — given this predicament, the cons outweigh the pros on Ford for now.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.