Starting in late April 2012, I wrote that I was short shares of Ford Motor (F) via put options. That trade saw Ford fall from about $12 to slightly under $9, and was closed out shortly after Q3 earnings were announced for a tidy gain. While noting that "cigar-butt" type investors might enjoy gains in shares of Ford (and GM), I felt the longer-term prospects of Ford didn't justify a place in most value portfolios.
As a result, I missed an excellent 62% run-up from trough to peak. This rapid gain and changes in the actual economy have made me reconsider my bearish position on the auto industry as a whole, and Ford in particular.
Tuesday's announcement of Q4 earnings offers a nice opportunity to revisit the investment thesis.
Ford's Q4 Earnings - Europe Still A Mess
Ford's numbers beat by a solid margin, with Q4 adjusted EPS coming in at $1.31 vs. estimates for $1.26. Fiscal 2012 net income was $5.7 billion, or $1.42 per share. The TTM P/E is 9.25 based on Tuesday's close of $13.14.
Some of the key takeaways:
- Very strong operating margin of 10.4%. This compares to GM's (GM) OM of 4.67% and Daimler AG's 7.02%
- The company's EU operations lost $1.75 billion
- Guidance for EU losses now about $2 billion
- 2013 SAAR outlook is now "at the lower end" of the 13-14 million range
- The company now has $24.3 billion in automotive cash and $10 billion in net cash
While Europe is an unfortunate situation to say the least, I believe the issues there are now well-reflected in both analyst and investor expectations. Though Ford will lose about $2 billion in 2013, almost $500 million of that will come from restructuring costs related to factory closings and production cuts.
While a turnaround in the European business is the last thing on anyone's mind, it's important to note that the European industry SAAR in 2013 will likely come in at the lowest level since 1993. This is a contrarian indicator; while European sales won't rebound anytime soon, it's difficult to imagine significant downside from here on out. Ford expects the region to break even by mid-decade.
If we net-out losses in Europe, net income is about $7.7 billion, or $2 per share. While not realistic for 2013, 2014, and perhaps not even 2015, the longer-term value of the company is better reflected by looking at the bottom line while ignoring Europe. With about 8% of the market share in Europe and a restructuring underway, the business still has plenty of underlying long-term value.
With sales in China soaring in 2012 and production capacity there expected to double by 2015, the Chinese operations are likely to become a meaningful contributor to earnings over the next few years. At $9.5 billion in APAC (Asia Pacific) sales for 2012, and nearly $15 billion in projected sales for 2015, the company could be earning about $750 million if it can operate at a 5% margin. $750 million in net income would add about $.20.
By mid-decade, let's say 2016, assuming break-even results in Europe, steady growth in North America, and Chinese operations that contribute to earnings, it's plausible that Ford will be earning $2.20-$2.50. Currently earning $1.42, a break-even EU operation gets EPS to $2, the aforementioned China projection adds another $.20, and NA market share and overall revenue can be expected to grow steadily over this time frame.
Given its strong automotive net-cash position of $10 billion (or about 20% of the current market cap), increased access to low-cost debt financing, and superb management, risk appears limited even after the 2012 year-end rally. Ford could be a potential three-year double on double-digit EPS growth and slight multiple expansion.