Ford Rattled by Europe, But Still Strong Long-Term

By Maxwell Fisher - August 3, 2012 | Tickers: CAT, F, GM, BA | 0 Comments

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Ford (NYSE: F) recently released second quarter results that could not have pleased anyone other than analysts who already had taken down their profit estimates in expectation of a big drop in earnings. A lack of confidence, a pending “financial cliff” in the domestic economy, and relative economic chaos in much of the European economy has made big ticket purchases scarce by recent historical standards. 

In its second quarter Ford posted profits of $1.04 billion, or $0.26 per share. Adjusting for one-time items, earnings were $1.203 billion, or $0.30 per share. Adjusted earnings in the second quarter of 2011 were $0.49 per share. The stock is not reacting too badly, as analysts had been expecting adjusted earnings of just $0.28 in the quarter. 

The good news is that this marks Ford's 12^th consecutive profitable quarter. Key North American pretax profits exceeded $2 billion. But Europe bedeviled the company's earnings by losing $404 million, and there appears limited hope for any quick turnaround in the euro zone. Ford anticipates losing over $1 billion in Europe this year, and there is talk of plant closures.

The quarter outside of North America was poor, even accounting for Europe. Ford South America went from a profit of $267 million in the second quarter of 2011 to a $5 million profit in the just concluded quarter on lower volume and higher costs. The Asia Africa group went from a $1 million profit a year ago to a $66 million loss due to model change overs. And even the finance company's quarterly profit fell from $604 million a year ago to $438 million in the recent quarter.

I still believe that, as always, the automotive business is product based, and the last place any company can afford significant cuts is on research and development. Ford has come a long ways from the days of the Ford Tempo and Bronco. It has introduced in Europe a small, three cylinder engine that will deliver more horsepower than Ford's small four cylinder engines do today. The cars powered by the new engine are expected to get fuel economies of over 45 miles per gallon, and the engine will be used in America in 2013. 

Ford is also jumping head first into the plug in electric car sweepstakes with its new C Max Energi hybrid. The car is anticipated to have a 20 mile battery only range, but a 550 mile overall range, and Ford is pricing it to undercut the Chevrolet Volt and Toyota's plug in hybrid as well. This is a small but important market, for as technology evolves, flexible fuel capabilities will increase in importance to all manufacturers. Ford has also recently introduced a new updated Lincoln MKZ, which takes dead aim at the Lexus ES 350, the starting price of which will be $175 more than the new Lincoln. 

When looking at Ford's financial statistics, bear in mind that it took a $12 billion one-time credit owing to past tax losses in the fourth quarter of 2011. One thing that is not in dispute is that Ford now has far more cash on hand than debt and an investment grade credit rating for the first time in years. And, most important, it has a plan. Auto companies are in a tough business in that model cycles take years, but events can change in a day. Being flexible enough to be able to respond in real time is among the best assets an auto manufacturer can have. The “One Ford” plan is an effort to mate supply with demand, further improve the balance sheet, accelerate new product development, and leverage effectively its global assets. In the months ahead, seeing how Ford deals with its European albatross will demonstrate whether “One Ford” is anything more than high minded words. It is hardly alone in European problems. General Motors (NYSE: GM), after all, has lost over $16 billion since 1999 in Europe. 

I look for Ford to have full year earnings this year of about $1.25 per share, giving it a price to earnings ratio of just 6.5. Still, its management, balance sheet, and product line make it the strongest of the domestic auto companies, and a good long-term holding for risk tolerant individuals. 

In earnings reports, we are seeing the twin problems of the European macroeconomic issues along with a rising dollar versus the euro, causing substantial earnings issues for large multinationals based in the U.S. Not all of them, however. Caterpillar (NYSE: CAT) smashed all revenue and profit estimates for the second quarter. Revenues rose 21% from the second quarter of 2011, to $17.37 billion. Analysts had expected $17.11 billion. Profits came to $1.67 billion, or $2.54 per share, over a 60% jump from the $1.02 billion, or $1.52 per share of last year's quarter. Analysts had been expecting earnings of $2.28 per share. The company raised its earnings expectations by ten cents for this year, to $9.60 per share. At its current price, it is selling for only just over eight times earnings. I thought a few months ago when the stock was about $100 per share that this company was a buy. At today's price, and a 5 year PEG of 0.49, I believe it to be a great buy. 

Boeing (NYSE: BA) also scarcely seems affected by the state of the European economy, as in the second quarter of the year it also beat analysts' revenue and profit projections. Quarterly revenue came to $20 billion, up 21% from last year's second quarter. The revenue expectation had been $19.25 billion. Quarterly profit came to $967 million, or $1.27 per share, a modest, 3% gain from the second quarter of last year, but it handily beat the $1.14 per share that had been expected. 

My reservations right now with Boeing are strictly political. As you know, our dysfunctional Congress faces a year-end deadline to enact budget reforms, or else we face discreet, across the board spending cuts, which would be most harmful to Boeing's defense business. In this day and age, I cannot count on a divided Congress to enact meaningful legislation on anything. Stay tuned.

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