Why I Believe Ford May Be a Hold, But Not a Buy

Congratulations to shareholders of Ford Motor Company (F), who saw the value of their shares spike to over seven bucks after the company reported second quarter profits of $2.3 billion. That was nifty news for the one 'Big Three' American auto maker that did not go asking the government for a bailout. (Call Transcript)

I don't own any shares of F, but if I was a shareholder, I'd be selling while the price was near seven dollars, unless I had a long term outlook with the stock in which case I would hold. But I wouldn't be buying right now.

The reason that Ford posted a profit was because of one-time 'special items', mainly a debt reduction plan, and not because of a recovery in business operations. Ford is undoubtedly on the right track towards profitability with operating expenses dropping, and the company predicts the break-even point for North American operations to come in 2011.

Shareholders of F have enjoyed a nice ride this year that started when the stock traded for under two dollars, but in my opinion, the upside is minimal from this point moving forward as the success of the American auto makers depends largely on an economy that hasn't yet turned the corner.

Long term, however, Ford could be a good pick, but I think there are other places to look right now that will offer higher short-to mid term gains than F.

I'm a fan of the Ford product but I'm still not a believer in a recovery in the auto market just yet. There's been too many years of poor management vision and abuse by the UAW for the auto makers to be looked at as a quick recovery story.

Disclosure: VFC has no position in F.

Comments

[Peder:]

I agree the economy is in bad shape, but I do think that Ford has an outstanding car-line up in Europe, and I also think that the new line-up coming to the US in 2010/11 will help boost Fords market share and sales. Unless the economy heads for another March 6th or October 20th, I think we can expect Ford to stay in the $6.5 to $7.5 range for quite a while (at least till Q1 2010).

Ford Europe has a great management team and I believe Mullaly and Booth are doing very well to turn this company around. You can't expect a turnaround overnight in such a large organization. These things take time, but as Mullally said, the turn-around plan is on target for profitability in 2011.

Ford in Europe has increased its market share in almost all markets and with the new Fiesta, KA and Kuga are beating their expectations.

I have heard some rumours about the new Focus being developed, and from what I can tell, this will be even bigger (more popular) than the current Fiesta, KA.

Disclosure: long F

Jul 26 08:45 AM

[staryjan:]

I am really impressed with the quality gains made by Ford. I believe that their workforce has gotten the message at all levels that they must produce the most problem free vehicles possible if they want to have a job and a future with the company. First time ever, Ford beat Toyota in initial quality for the most recent reporting period.

Disclosure: Ford retiree, stockholder

Jul 26 10:16 AM

[tesshiva:]

Fair enough. The economy is in a shambles and you illustrate the difference between trading and investing. I don't believe Ford is much of a trade currently, so while I've traded a lot of my stock, I've also held onto a good-sized block in my retirement account and I've gifted some to my son's retirement account, because I believe that when the dust settles, Ford will be a strong leader and an enduring American brand. PS I think their coming line-up of cars and trucks is unbelievably strong - design, price-points, branding - Ford appears to cover a lot of bases and is on a clear and strong trajectory. When people resume buying cars (which may take some time), a lot of them will be buying Fords!

Jul 26 11:54 AM

[qw:]

A 20% increase in share price over the next 4 to 5 months appears realistic based on their recent increasing market share performance. Their recent quality successes and upcoming product portfolio is impressive.
In Mullaly they probably have one of the best CEOs in the country.
Ford could quite easily surpass GM and Toyota in US market share in the next 18 months.

Jul 26 01:33 PM

[noendinsight:]

The stock will retrace to the $5.90 level. That will be the last time you will see that range for years to come. This stock will see the 8-9 range by years end.

Jul 26 03:08 PM

[Jobu37:]

Ford books revenue the minute a completed unit leaves the factory. The fact that 3rd quarter production is scheduled to be up 25% year over year in NA bodes well for topline revenue growth in Q3. Combine this with the fact that they have been able to increase transaction prices each subsequent month since March provides credible evidence that they will be able to beat the 2nd Qtr numbers. After one time gains and losses they lost $441 million in Q2. With the heavier production numbers along with better margins it is very likely that Q3 will be much better than Q2.

Other points to keep in mind:

Cash for clunkers started officially this past Saturday and the demand has been higher than anticipated for all makes, with Ford being stripped of inventory equal to or better than the competition. The only model that has been performing poorly this year, due to low gas prices, has been the Focus. This weekend the Focuses were flying off the lots. You can expect an increase in production of the Focus being announced this week.

Overseas, the plants that build the Fiesta (Spain, Germany, and China) are all producing at full capacity and they are still not keeping up with demand. This will continue through Q3 and if there is any semblance of a real recovery in Europe you can expect models such as the Mondeo and Focus to start picking up sales as well.

The only downside is continued weakness in South America. Most of the markets down there have not suffered during the recent global recession but are now starting to cool off. Ford was still profitable in Q2 but that may not be the case in Q3.

A Q3 loss of $200 million pushes this stock to $8-$9 by October. Even if they pay down more debt with stock the dilution will be irrelevant compared to the reduction in bond interest expense.

And Ford has shown time and time again a habit of under promising and over delivering. If they say they still see 2011 as the year they return to profitability you can rest assured what they really mean is 2010. Alot of this depends on when the pent up demand for cars starts to pick up. If Q4 is when the industry starts selling at a 11 million annual selling rate it is very possible that Ford will be back in the black in the 4th qtr. They are currently very lean and have a very high level of pricing power in the market.

Jul 26 07:17 PM

[User 461214:]

I agree that the economy isn't there yet BUT I also believe that auto sales will increase faster than most people think. There is some pent up demand due to an aging fleet out on the road.

Once sales rebound you can expect significant progress from loss to profit at the automakers who also gain marketshare. The auto business has a high fixed cost structure but once breakeven is crossed, the profits and cash flow will rise fast. 2010 is starting to look good to me for Ford progress.

Jul 26 08:56 PM

[Worldtravel...:]

Since Ford has a quality management team in place and quality products to sell, the largest obstacle performance is their competition with "Government motors." Similar to what we are expecting from government run health care, GM won't have to show a profit and will presumably have the Obama credit card to finance any and all projects.

Ford's long term prospects when competing with a competitor with unlimited cash can only end in disaster. Ford's only hope is that the car buying public is so offended by a Government owned car company that boycott their products and suffocate the company.

Who knows what gestapo tactics the Chicago mafia will take at that point? Have a nice day.

Jul 27 09:18 AM