Is it Time to Cross the "Ford"?
Ramesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Ford Motor Company (NYSE: F) released its results today on Tuesday, October 30 despite Hurricane Sandy shutting down Wall Street. It was hard to miss the irony - while hurricane Sandy was bringing torrential rain into the eastern seaboard of the USA; FORD’s results were essentially making the case to investors to symbolically “cross the Ford.” The dictionary meaning of FORD is a crossing across a shallow body of water through wading. The question is this – are investors now able to take the recovery signs seriously enough to step into the “Ford” and go buy Ford shares? Turns out, the answer is "Yes"!
Ford delivered extraordinary results for the third quarter, with $2.2 billion in operating profit along with net income of $1.6 billion. According to Ford, this is their best ever third quarter pre-tax profits, driven by record North American results. Analyst expectations were for 30 cents a share in earnings. Ford beat that by 10 cents with 40 cents in earnings per share. Furthermore, Ford states that this is the highest quarterly profit and operating margin that its North American unit has shown since the year 2000. This is correct when the results were broken out with the North American region as a separate business entity. In effect, this appears to be a solid North American growth story.
Ford’s results are more solid than the generally better third quarter performance by its North American based rivals for the third quarter. General Motors (NYSE: GM) and FIAT both reported better than expected earnings this week as well. FIAT owns Chrysler, the brand that obtained the US government bailout along with GM. According to FIAT, US Vehicle sales increased by 14% for Q3 and interestingly, sales of the Dodge RAM pickup had its best September sales performance since 2007. Pretty impressive given where gas prices have been lately. A glance at the earnings report shows North American automotive sales performance via the Chrysler unit is better for the most part compared to FIAT’s other units across the world.
GM also reported profits although its Q3 results were affected by poor performance in Europe, just like Ford. GM’s income for this quarter was $1.5 billion compared to $1.7 billion a year ago for the same quarter and its European business appears to be a drag as well and explicitly called out in their earnings release. According to the release, there is a “still a lot of work to do.” I wouldn’t be surprised if there is restructuring in the horizon for GM’s European operations as well. Sales for GM’s North American unit were lighter than last year’s Q3 numbers and also affected the earnings. Earnings expectations were a consensus of $0.68 per share and GM did better with $0.89. No wonder the shares rallied and Investors appeared to agree with CEO Dan Akerson’s assessment that “GM had a solid quarter.”
Compared to GM and FIAT, Ford appears to be best positioned to do substantially better than its peers. After all, FIAT’s commitment to Chrysler is still unconvincing and the US government’s stake in GM continues to be an overhang on the stock. The US government could unwind some or all of its holdings at an inopportune time and that could put pressure on the stock just when it starts to look good. So, what is Ford’s Achilles heel? Well, thanks to last week’s announcement regarding Ford’s plan to restore profitability and growth in Europe, we know. On October 25, Ford announced a restructuring plan that included the closure of some facilities in Europe, workforce reductions and productivity improvements. The third quarter profitability announcement is all the more remarkable after Ford disclosed last week that the loss that it has suffered in European operations is expected to exceed $1.5 billion. The current plan calls for a return to profitability in Europe by 2015.
Ford shares have been in decline since January 2011 from about $18 after a meteoric rise from about a couple of dollars per share in January 2009. Ford has strong and committed management and we must remember that it is the only American automobile manufacturer who chose to slog it through the 2008 depression without government bailout funds. Through either prescient planning or fortuitous decision making, Ford had lined up private sector financing ahead of the stock market crash of September 2008. Not that avoiding bankruptcy or using government bailout funds is a huge reflection of superior management competency, but it does show that Ford does plan ahead and does so consistently. The recent European plan announcement is a reflection of that trend.
Ford shares have been on a slight upward trajectory since August 2012 and have a forward P/E ratio of about 7. That is slightly below peers and overall, Ford does have room for growth as automotive sales throughout the world is showing signs of picking up. In addition, Ford has a vastly improved reputation with existing and new customers and this is mostly due to the way the company has conducted itself in recent years. As the economy improves over the next year and beyond and as consumers who have put off car purchases start buying again, the Ford story is only going to get better. I rate Ford a Buy.
Drive Home with Additional Analysis
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malayappan has a position in 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.