Ford: A Long Road Ahead

| About: Ford Motor (F)

Sales are up, profits are robust, yet shares in Ford Motor (NYSE:F), like other automakers, are flat for the year despite the gains of the overall stock market.

Through the first three months of 2013, Ford shares are up about 1.54%, while the S&P 500 has increased 10% and the Dow Jones is 11.25% higher. This despite the fact that Ford reported its largest fourth-quarter pre-tax profit in more than a decade when it reported earnings in late January.

Shares of Ford are valued at $13, about where they were a year ago. The stock hit a 52-week low of $8.82 in July 2012 and a 52-week high of $14.30 on January 15, 2013. The current price-to-earnings ratio on Ford stock is 9.40.

The only American auto company that didn't require government bailout assistance during the financial crisis of 2008-09, Ford has reported strong sales and earnings results as of late, even if its stock price doesn't reflect it.

Strong Fourth-Quarter and Full-Year Results

Fourth-quarter revenue improved from $34.6 billion in 2011 to $36.5 billion in 2012, while full-year revenue decreased slightly from $136.3 billion to $134.3 billion. Fourth quarter earnings totaled $1.2 billion, up 56% from 2011. Full-year earnings fell slightly from $6.1 billion to $5.6 billion.

Ford generated positive operating-related cash flow from its automotive division of $1 billion in the fourth quarter - the 11th consecutive quarter of positive performance - and operating cash flow from its automotive operations totaled $3.4 billion for the full year.

In the fourth quarter, total company production was about 1.5 million units, 125,000 units higher than a year ago. This is 13,000 units higher than Ford's most recent guidance. For the full year, Ford produced 5.7 million units, up 54,000 from a year ago.

The company expects first quarter production to be about 1.6 million units, up 160,000 units from a year ago.

Ford, along with the other U.S. automakers, has enjoyed significant sales growth so far in 2013. In January, Ford, GM and Chrysler each reported double-digit sales gains. Ford's retail sales rose 24%, with the sale of cars up 34%, utility vehicles up 23% and trucks up 11%. A recent Bank of America research report forecasts a strong year in 2013, and that U.S. vehicle sales could hit a high of 18 million units by 2018.

In February, all three reported sales gains, with Ford leading the way at 9%. Ford F-Series pickup sales rose 15%, its best February results since 2007. Ford said pickup trucks accounted for 12.3% of the U.S. auto market in February, up from 10.7% a year earlier.

Struggles in Europe

The trouble at Ford, mirroring the challenges faced by all U.S. automakers, stems from the struggle to profitably sell vehicles outside of the United States.

The biggest problems are in Europe. Ford's European division sold 15.5% fewer vehicles in 2012 than in 2011, while taking a loss of $1.7 billion, compared with a $27 million loss in 2011. The company expects a wider loss of $2 billion in Europe in 2013 and $3 billion total over the next two years.

In the Asia Pacific region, Ford increased sales 14.6% from 2011 to 2012, much of that from growth in China, while reducing its annual loss in the region from $92 million in 2011 to $77 million last year.

In South America, the company sold slightly fewer vehicles than in 2011, while its pre-tax profit in the region fell from $861 million in 2011 to $213 million in 2012. The company expects to break even in South America in 2013.

Ford has overcome these challenges by performing well on its home turf and using its resources to shore up its balance sheet.

Ford's North American unit set records for fourth quarter and full year pre-tax profit and operating margin since the company established the region as a separate unit in 2000. For the full year, Ford North America's pre-tax profit was $8.3 billion with an operating margin of 10.4 percent, compared with $6.1 billion and 8.3% in 2011.

It's also worth noting that Ford had to overcome these obstacles in North America during the financial crisis. Between 2006 and 2008, Ford lost $30 billion, but has returned to profitability primarily by cutting costs. The company said it will employ the same tactics in Europe, with plans to shave $500 million a year in expenses, reduce in-stock inventory by 20%, and shed factory capacity.

Improving the Balance Sheet

Although its debt equals 659% of its total equity, compared to the industry average of 143%, Ford has retired a significant amount of its long-term debt over the last several years. Its long-term debt has gone from $115 billion in 2009 to $72 billion at the end of last year.

Through the first three quarters of 2012, Ford increased its liquidity position by $2 billion and generated 10 consecutive quarters of positive operating-related cash flow from its automotive business. Its two liquidity ratios, current and quick ratio, are both around 2.

Ford has been also been using excess cash to strengthen its pension fund and paying shareholder dividends. The company re-instituted a dividend in 2012, paying $0.05 a share each quarter, then doubling that to $0.10 in the first quarter of 2013. The current dividend is yielding 3%.

The company also hopes to grow in the realm of hybrid and electric vehicles, where it's planning to invest $135 million. Last year, the company launched all-new C-MAX, C-MAX Energi plug-in hybrid, new Fusion Hybrid and Fusion Energi plug-in hybrid fuel-efficient electric vehicles in 2012. It expects hybrid sales to improve owing to the new launches and plans to triple production capacity of electrified vehicles by 2013.

It's still a long road ahead for Ford. It has to improve sales and profitability overseas while continue to improve its business in the U.S. It has to increase shareholder value while still trying to unload a lot of debt. It has to continue to find buyers for its flagship truck line while also investing in future product lines.

But it's not an impossible road. Ford's turnaround over the last several years has proven that.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.