Ford Earnings Preview: Intrinsic Value Range Low-Mid $20s

| About: Ford Motor (F)

Ford Motor (NYSE:F) reports their calendar 4th quarter, 2012 financial results before the opening bell Tuesday morning, January 29th, 2012. Analyst consensus (per ThomsonReuters) expects $0.26 in earnings per share (EPS) on $32.965 billion in revenues, for expected year-over-year growth of 30% and 1% respectively.

Both EPS and revenue estimates have been stable since the October quarter's results were reported.

In the 3rd quarter, 2012 (here is our link previewing the October quarter), Ford reported $0.40 in earnings per share, beating the $0.30 estimate by 33% with a 3% miss on revenues. Frankly, I don't think much has changed about Ford since the October quarter's report, which saw the North American pre-tax auto margin at a record high for the automaker, while Europe was on the way to losing about $1 billion for calendar 2012.

The key question around Ford near-term (in my opinion) is whether the automaker can sustain its North American strength as Europe stabilizes, and at least so far in 2013, that seems to be the case.

The US auto industry is thought to have an aging fleet of cars (the average age today is 12 years for the typical American car today) and the SAAR (seasonally-adjusted-annual-rate) of sales remains subdued, well below the 16 - 17 million seen with a normal economy, thus the macroeconomic drivers remain in place should the US consumer feel compelled to go out and spend on new cars in the next 5 years.

In the interim, Ford, thanks no doubt to Alan Mullaly's influence, has improved its operational efficiency as evidenced by the record North American pre-tax auto margin in Q3 '12, so the auto OEM is controlling what they can, as they await the return of a more favorable global auto tailwind.

Ford's stock has seen a number of downgrades the past few weeks, thanks primarily to what looks to be the thought that Ford's cost streamlining and reduction has run its course and that the North American pre-tax auto margin increases have probably maxed out in here.

I'm not so sure about that premise, but the next major catalyst for the shares is likely to be top-line or sales driven, rather than cost or margin related.

Qtr '12 eps '13 eps

y/y est


'12 rev


'13 rev


current $1.34 $1.46 9% $124.99 $130.7
Dec '12 $1.34 $1.46 9% $125 $130.6
Oct '12 $1.27 $1.64 29% $125.55 $131.74
Jul '12 $1.28 $1.52 19% $126.8 $133.6
Apr '12 $1.46 $1.71 17% $131.6 $140.5
Jan '12 $1.49 $1.72 15% $131 bl $139 bl

* Consensus estimates courtesy of ThomsonReuters

If Ford's European segment would simply break even on an operating basis, it would contribute $0.25 to Ford's EPS, or roughly 15% to the 2013 consensus EPS estimate.

Trading at roughly $13.75 per share, or 10(x) 2014 consensus EPS estimate of $1.46, Ford's relative valuation is getting stretched if you view it through the historical prism of the F's p.e trading at 40% to 70% of the S&P 500's P/E over time. (The problem with that relative valuation prism is that Ford has exited the 2008 Great Recession as a different company, and from what I can tell thanks to the use of the VEBA trusts, the union healthcare expense or PBO has been reduced for both Ford and GM going forward.)

Ford has been one of our portfolio dogs the past few years, but we believe Ford is making a better-quality car that US consumers want to buy, and that Alan Mullaly would lower the cost structure of the automaker over time. Ford has had a remarkable run since its 2012 low of $9 in early August, 2012, increasing 43% by December 31, 2012.

Longer-term, Ford's stock price peaked at an all-time high in the Spring of 1999 near $39 per share, and peak EPS was roughly $5.20 in both 1997 and 1999. (Ford earned $15 in EPS in 1998, but the parent spun-off Associates, and part of Hertz (NYSE:HTZ), and had a few other non operating items.)

To earn just half that today would be a peak EPS of $2.60, and if a 10(x) multiple is assumed on that earnings power, (depending on what the SP 500 was doing) you would think Ford would be fairly-valued in the low to mid $20's, depending upon what is happening within the US and global economy.

Historically, if you look back at Ford in the late 1990s, 2012's revenue growth of $125 billion is shy of 1999's $135 billion and 2000's $141 billion in automotive sales. The thing is, I think Ford could generate healthier EPS growth for the same absolute level of sales today, given the higher North American pre-tax auto margin, but as Ford crept in the $20s in terms of the stock price, we would think it would be getting fully valued, and that is assuming Ford Europe and Latin America operate as usual.

We will continue to hold the stock for clients, as we think Ford has better days ahead.

Disclosure: I am long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.