Three Unnoticed Takeaways From Ford's Earnings

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Unless you were sleeping throughout the day on Wednesday, you caught a glimpse at Ford Motor Company’s (NYSE: F) near 7% gain after record earnings. The most notable facts from the company’s quarter were sales of $32.10 billion and an EPS of $0.40, which beat expectations by $0.10! However, as with any quarter, there is more than just top and bottom line performance that should be assessed when deciding on an investment. Below are three takeaways from the company’s “killer” quarter.

Upgrades Drive Price

I know that analyst upgrades aren’t necessarily an earnings catalyst; however, they are driven by earnings. And on Wednesday, following earnings, Goldman Sachs and UBS set Ford’s price target to $15. This is significant because it further validates the quarterly performance for investors, and basically tells investors that “it’s safe to buy shares”. Ford, along with General Motors (NYSE: GM), have been highlights in the U.S. economy for the last two years, yet neither have performed. It looks like with both companies posting a huge beat that the auto industry might finally be ready to trade higher.

Europe is Still Problematic & the Loss Will Worsen

Ford reported that it’s now expecting to post an annual loss of $1.50 billion in Europe, a revision from its $1.0 billion loss set earlier this year. Why is this significant? Because it shows that the European economy is declining faster than Ford can manage. To miss your own expectations by 50% is potentially a big problem. Think about what the reaction would’ve been if Ford had guided down full-year net income by 50%, it would have caused massed selling. Yet because of record performance in the U.S. we somewhat discounted this mishap on behalf of management to predict the demand in Europe.  

There weren’t many negatives from the company’s earnings, but an additional $500 million in losses out of Europe could pose a problem. However, the company did post a smaller loss in Europe compared to General Motors, although GM went on the record saying that it expects to be "break-even" by 2015. Therefore, can we expect the same from Ford? 

During Ford’s mid-decade report, last year, it projected sales growth of 50% by 2015 which would be driven by global growth. However, such a large miss in Europe may signal that Ford does not have a good grasp on global markets and that it may not meet its goal. If you dig deeper, the company’s decision to close three plants should’ve helped with the loss in Europe, yet despite closing these plants the expected loss has continued to rise. I know that everyone is feeling good about Ford, and GM’s, earnings, but global growth is something to monitor over the next several quarters as a potential issue.

Ford Loses Market Share in U.S., Despite Record Performance

Like I said, there aren’t too many negatives from Ford’s quarterly report. However, the company did announce that its market share in the U.S. was 14.8%, which is actually down 1.5% from last year. Then, on Thursday Ford missed monthly sales expectations in the U.S., while GM exceeded expectations. Perhaps this is further proof that Ford is losing its edge in the U.S.

The company stated that its lower market share is a reflection of discontinued products such as the Ranger and the Crown Victoria, but as an investor, this is something to notice, especially if trying to decide between Ford or GM as a potential investment.

Strangely enough, neither analysts nor investors made a big deal about the loss of market share in the U.S. Ford is a company that is usually dissected to the fullest extent when it reports earnings. However, the company’s record pre-tax operating income of $2.2 billion clouded all potential problems that may arise. Hopefully, the company can continue to operate efficiently and keep its profits high in the U.S. to offset a 20% decline in European demand.

Conclusion

Anytime a company posts a record quarter in pre-tax operating income in this economy it is a reason for celebration. Ford was considerably undervalued before reporting earnings, trading at just 0.30 times sales and a trailing P/E ratio of 2.50. Therefore, it was poised to pop with any signs of strength. However, Ford was yet another company that continued a pattern that we’ve seen during this earnings season: It beat on bottom line but missed on revenue expectations, as sales fell 2% year-over-year. Overall, I think it was a strong quarter, and that the stock is still cheap. But I would pay attention to the problems noted above, and watch for any changes in demand within global markets. 

Drive Home With More Analysis

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford’s stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of The Motley Fool’s top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

 


BrianNichols owns shares of Ford. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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