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Is Ford a Buy After Earnings? 3 Pros, 3 Cons

Ford’s sales, profits keep rolling, but keep an eye on Mulally

   

Ford (F) has been firing on all cylinders recently: Shares have gained nearly 70% in the past year, its Focus compact is duking it out with Toyota’s (TM) Corolla for the world’s top-selling nameplate, and the company is boosting its market share in emerging markets like China.

But despite Ford’s strong sales, attractive valuation and share growth, the automaker still faces headwinds that could limit its future growth. Rumors that Ford’s President and CEO Alan Mulally could leave Ford early to replace Steve Ballmer at Microsoft (MSFT) have spooked analysts and investors because Mulally is the architect of Ford’s comeback.

The good news: Mulally said last week that nothing has changed and he plans to remain at Ford at least through the end of 2014. But the Mulally watch aside, is Ford a Buy after earnings? Here are three pros and three cons.

Pros

Strong Quarterly Earnings: Last week, Ford reported Q3 pre-tax earnings of $2.6 billion (45 cents per share), cruising past Wall Street estimates of a 37-cent EPS. However, that’s not quite the whole story — special charges related to pension buyouts and plant closures in Europe whittled that net income down to $1.27 billion (31 cents per share). Still, this marks the 17th consecutive quarter in which Ford has posted a profit. It doesn’t hurt that rating service Standard & Poor’s upgraded Ford’s rating to investment grade in September.

Strong Regional Sales, Product Mix: The strong results were driven by sales growth in North and South America, as well as in the Asia-Pacific region.  Ford’s dominant pickup truck line has been a big part of its success story — particularly the F-150. The fuel-efficient Focus Electric and C-Max models are growing in popularity, too. Ford continued to strengthen its product line by launching several new models in the third quarter: the Fiesta ST in the U.S., Cargo Extra Heavy Duty and the Fusion Hybrid in Brazil, Focus in Argentina, Focus Electric in Europe, and the Mondeo in China.

‘One Ford’ Focus: At the core of CEO Alan Mulally’s growth strategy is the company’s “One Ford” plan — adopting a unified global manufacturing strategy that aims to reduce the number of global vehicle platforms from the current 15 down to nine, expanding manufacturing operations into emerging markets and optimizing production by running multiple shifts around-the-clock. COO Mark Fields has been Mulally’s right-hand man during the turnaround and is a true believer that Ford is on the right track — since Fields is the heir-apparent, the “One Ford” focus should be around for a while.

Cons

Costly Challenges in Europe: Although Ford managed a slight improvement in Europe, it posted a negative 3.5% operating margin and a pre-tax loss of $228 million in the third quarter. For the first nine months of 2013, Europe’s operating margin was negative 5%, and the pretax loss was $1 billion. Expect continued sluggish sales in Europe — but over the long haul, Ford’s $400 million in restructuring costs in that market should eventually help boost margins, earnings and sales volume.

Fallout from Washington’s Fiscal Fiasco: The auto industry by nature is a consumer cyclical sector — it stands or falls with consumer confidence. And even though the high-stakes game of political chicken that shut down the government and threatened a default is now over, S&P estimates that it took a whopping $24 billion out of the U.S. economy. In the wake of that fiasco, consumers are becoming increasingly wary of lawmakers’ intentions; and worry keeps wallets closed — particularly when it comes to big-ticket items like cars.

Uncertainty in South America: In Ford’s earnings conference call, Mulally said he expects South American efforts to break even or even show a small profit for the full year. But that’s far from a guarantee. “We continue to introduce new global products to support product led growth over the remainder of the year, even as we work to adjust to an uncertain environment in the region,” Mulally said. That uncertain environment includes potential risks like economic weakness in Brazil, Argentina and Venezuela, and political challenges in the latter two countries.

Bottom Line

If all goes very well, Ford could return to break-even status by the end of next year. With Europe in recession and mixed results in emerging markets, North America (and the U.S. in particular) and Asia likely will be the engines of growth for automakers as they round out the year and head into 2014.

So should you buy Ford? Yes, F is a good stock to buy and hold onto for a while. Ford is seizing opportunities in Asia-Pacific countries — particularly China. With a price to earnings growth ratio of 0.75 and a forward P/E of 10, Ford shares still look cheap. Plus, the company is swimming in cash (nearly $10 billion) and offers a 2.3% dividend yield. That makes this stock solid now, and ready to roll as the global market accelerates.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/10/ford-buy-earnings-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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