On Tuesday, Ford (NYSE:F) was able to beat the earnings estimates by a decent margin despite the negative consequences of the recession in Europe. Ford earned 31 cents per share in the fourth quarter, compared to the 26 cents expected by the analysts. The company generated $36.5 billion in revenues whereas the analysts were expecting it to generate $33.17 billion.
Before I analyze Ford's results, I would like to remind the readers what I said regarding Ford's seasonality in my last article about the company:
"In the summer of 2010, Ford traded for roughly $10. In the second half of the year, the company had a rally and the share price moved up to $18. By next summer, Ford's share price fell down to $9.67. Again, the company saw a rally in the winter, carrying the share price up to $13. In the summer of 2012, the share price plunged again and fell below $9.00 for the first time in years. In the winter of 2012, the share price is up again and it is ready to reach $14.00. Do you see a pattern? Ford experiences a plunge in the spring-summer and a rally in the fall-winter."
Regardless of Ford's financial performance, the company's stock price seems to outperform from summer to winter and underperform from winter to summer. This may be happening again as Ford seems to have reached a peak recently at $14.30, after which there has been a slow but steady decline.
Having said that, I still think it is important to look at Ford's fundamentals because whenever a stock's technicals and fundamentals disagree, sooner or later fundamentals take the driver's seat and end up setting the tone in the long term. Now let's discuss Ford's fourth quarter results.
If we exclude the one-time tax benefits Ford got in 2011, the company posted a 54% growth of quarterly earnings compared to the same quarter last year. Despite reporting a loss of $732 million in Europe, Ford was able to earn $1.59 billion in the quarter mostly due to the strong results in North America and China. For the year, Ford's earnings totaled $5.66 billion, which is slightly down from $5.97 billion in 2011 excluding the tax benefit. This was a result of a $1.75 billion loss reported by the company in Europe. With the addition of last quarter, Ford had 14 profitable quarters in a row.
Once again, Ford's North American performance was greatly influenced by the company's F-Series pickup trucks. As the housing market improves in the US, more people are feeling the need to buy a new pickup truck in addition to a large number of people replacing their old pickup trucks with newer and more fuel efficient ones.
In Europe, the company will have to utilize the same tactics it used in the USA just a few years ago when the demand was low and margins were negative. As Ford improved its quality of products while cutting costs, the company's image and revenues improved greatly in North America. Now the same needs to be done in Europe where gas prices are much higher and people have a different taste in cars compared to the US.
For 2013, Ford expects to be profitable in North America and China but it also expects to report another large loss in Europe. The company expects to reach breakeven in South America and Asia-Pacific where German car companies like Volkswagen (OTCQX:VLKAY) and BMW (OTCPK:BAMXY) are growing strongly in the luxury segment and Japanese companies like Toyota (NYSE:TM) and Nissan (NSANY.OB) are stealing market share in the other segments.
In 2012, Ford's operating margin was 5.3%. In 2013, the company expects the margins to either stay around the same or go slightly lower. It looks like the turnaround efforts in Europe will be quite costly for the company. The good news is that Ford has more than enough cash to finance a turnaround in the continent. Ford's automotive segment currently has $24.3 billion in cash and $14.3 billion in debt. For the time being, Ford is likely to use its North American profits to finance the turnaround efforts in Europe though.
In the quarter, not only did Ford double its dividend payments from 5 cents per share to 10 cents per share (per quarter), it also promised to pay 45,800 employees an additional $8,300 for the company's profit sharing plan. In addition to this, Ford spent $3.4 billion to make cash contributions to its pension obligations for the company's employees. While these payments will be costly for the company, they will ensure that the high quality employees stay with Ford.
The Good And The Bad:
The Good: Ford continues to be profitable overall and the company reported positive cash flow despite losing a lot of money in Europe, paying dividends, paying off debt and making major contributions to the company's pension plans. Also, Ford beat the estimates by a decent margin and it is performing better than many people expected it to perform. As of the end of 2012, Ford's P/E ratio is 8.78 despite a strong rally in the recent months. Excluding Ford's cash holdings, the company's trailing P/E ratio falls down to 4.56, which is impressive. Keep in mind that most of Ford's
The Bad: Ford is still having trouble with selling cars in Europe, even though it is not fully the company's fault. I was disappointed to see that the company's profit in South America in 2012 was only $213 million compared to $861 million in 2011. Ford reported that higher costs, slightly lower demand and currency exchange rates played a role in this. In Pacific Asia and Africa region, Ford reported a loss of $77 million for the year. On a positive note, in this region, the company passed 1 million cars and $10 billion revenue for the first time ever.
When we look at Ford's fundamentals, the company is still undervalued. On the other hand, Ford had a massive rally from summer to winter of 2012. Moving forward, there might be a correction in the short term, which might last more than a month. In the long term, Ford is still a solid company with a lot of potential. If the company is able to fix its issues in Europe and South America in the near term, Ford can easily see $20 per share. Also keep in mind that Ford continues to have seasonal cycles where it performs greatly between late summer and early but performs much worse between mid winter and early summer. Short term traders should be well aware of this.
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.