Ford Earnings Preview: It's All About Europe

| About: Ford Motor (F)

Ford Motor (NYSE:F), the iconic North American auto manufacturer, reports before the bell on Wednesday morning, April 24th. Analyst consensus is expecting (per ThomsonReuters current estimates) earnings per share of $0.38 on $33.78 billion in revenues for expected year-over-year declines in EPS of 3% while revenue growth is expected at +3% year-over-year.

We are currently long Ford stock for clients, and after hearing some prominent industrial names comment on current business conditions in Europe last week, I wonder if Ford can just limit its losses in Europe, the stock might have a fighting chance.

With the December quarter's results reported in January, Ford guided to a higher loss of $2 billion for Europe in calendar 2013, which amounts to $0.50 per share given the current 4 billion shares outstanding.

What is worrisome is that Ford management has gradually taken its expected loss in Europe higher over the last few quarters, so if the auto company can simply not guide Europe to a greater loss on the Q1 '13 call, it might be a Pyrrhic victory for investors.

Ford's Pre-Tax Profit Mgn by Region
Region 12/12 9/12 6/12 3/12 12/11 9/11 6/11 3/11
North Am 8.47% 11.98% 10.20% 11.47% 4.54% 8.65% 9.78% 10.3%
Europe -11.26% -8.03% -5.76% -2.07% -2.29% -3.93% 1.96% 3.37%
Latin Am 4.68% 0.39% 0.21% 2.25% 3.86% 9.26% 9.21% 9.13%
Asia-Pac 1.39% 1.69% -2.93% -4.13% -4.37% -1.83% 0.05% 1.57%
Total 3.84% 7.46% 6.33% 7.87% 3.81% 6.71% 8.82% 9.95%

By region, North America is currently 2/3rd's of Ford's total revenues and all of the globe's operating income. As you can see from the regional trends in operating margin, if Europe's cost structure can be stabilized or revenues stabilized with the current cost structure, it would go a long way to helping Ford generate operating profit globally.

If Ford can get North America's pre-tax auto margin back up into the 12% area, I think it would be huge, but i also think that any further margin gains north of 12% for North America is limited.

Currently F is trading at 10(x) and 8(x) 2013 and 2014 EPS estimates of $1.39 and $1.67, although EPS estimates are still trending lower after revisions.

While seemingly cheap at 10(x), F is trading at 5(x) overall cash-flow and 9(x) auto cash-flow which leaves Ford more fairly valued and at the higher end of its recent valuation range.

The real question for us is "peak earnings per share" for the auto maker now that they are making a better product and seems to have cars that want to be bought.

We think F can eventually earn $2 per share, but it would take a return to global growth that just is nowhere in evidence today, particularly in Europe.

Our internal model values Ford at $12 per share currently, while Morningstar still carries an "intrinsic value" on Ford of $20 per share.

Ford peaked at $36 per share in the late 1990s and since then shares outstanding have doubled from 2 to 4 billion, which is why I think that most investors think F is fully valued in the high teens. However, Ford has already surpassed peak North American Auto margins from the 1990s, so for a given level of revenues, they should be able to drive higher EPS.

Europe is the key to Ford: if F can guide to stability in Europe, and not guide lower, and if North America can continue at a decent clip, in our opinion the stock has more upside.

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.