What Do Ford’s Earnings Mean for You?
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Ford (NYSE: F) reported second quarter net income of a billion dollars or $0.26 a share and pre-tax operating profit of $1.8 billion or $0.30 a share. This was slightly ahead of expectations, but the stock has continued to drift lower, now around $9 a share. This begs the question, what do Ford's earnings mean for you?
First, a little refresher. In the week leading up to the report I had this to say about what to expect, “For the earnings report we’ll be watching to see how Ford is doing overseas and if they are experiencing any slowdown domestically. Analysts are expecting earnings of around $0.28 a share for the quarter. However, 10 of the 11 analysts have revised their estimates lower over the past four weeks so a miss is not out of the question.” Not only did the company not miss but the report shed some light on how business is both domestically and internationally so let’s take a quick peek under the hood.
The company pointed out that their solid results were driven by both Ford North America and Ford Credit while they experience challenges in Ford Europe and Ford South America. In fact, CEO Alan Mulally went as far as to call both North America and Credit a “strength.” The company also confirmed its outlook for North America for the balance of the year. While business is just fine here in the states, overseas is a different story.
In South America, while they had a slightly positive pre-tax operating profit and operating margin, they saw substantial declines in volumes to go with higher costs and unfavorable currency exchanges. They expect the division to remain profitable for the full year, but at a much lower level over last year. While it is an area to watch, right now things appear to be ok.
While North America is doing just fine, and South America is ok, things are not going too well in Europe. Ford expects a full year loss of more than a billion dollars. There’s really nothing good to report here, the company is working on a turnaround but they see the challenges to be more structural than cyclical. They are beginning to look elsewhere for growth and they are investing a lot of money in Asia to take advantage of the growth in that region. If successful, Ford's Asian growth could help take some pressure off of their slowing sales in Europe.
If you are following my “No Drip, No Mess” Portfolio you know that we have a unique position on Ford with a covered straddle that expires in September as well as some uncovered shares. Given that it looks like our shares will be staying under our $10 strike price it looks like we’ll be keeping all our shares and likely pickup up an additional set of shares. I have no problem with this outcome, as I’m hoping to write options on some of the shares for a long time while also capturing some of the upside when their sales and profits do turn around. Once Ford starts to accelerate closer to $10 a share I’ll look to write covered calls on some of the shares to pick up some additional income while always holding some shares uncovered to capture the upside.
Ford’s earnings don’t really mean a lot for investors; business is doing as well as can be expected given the current economic conditions. They are building cars that customers want and competing well with their peers. While both GM (NYSE: GM) and Toyota (NYSE: TM) have done admirable in overcoming their bankruptcy/bailout and tsunami/safety issues respectively, and Honda (NYSE: HMC) remains a solid global player, I still think Ford is the best of the automakers for the long term. In the short term, I’d not be surprise to see Ford stuck in reverse for a while as the global economic picture stays out of focus. As a very economically sensitive industry GM, Honda and Toyota will continue to be pressured by the whims of the market. Given its single digit share price and our small capital base, I think we can generate a decent amount of income from trading around Ford’s shares while we wait for their exceptional management team lead by Alan Mullay to drive Ford’s shares higher.
latimerburned has an options position on 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.