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Ford Motor (NYSE:F) reports their calendar 2nd quarter earnings before the bell on Wednesday, July 24th, 2013.

Analyst consensus is looking for $0.37 in earnings per share (EPS) on $35.2 billion in revenue, for expected year-over-year (y/y) growth of 23% and 12% respectively.

Analyst consensus has crept higher during the quarter. Originally consensus was looking for $0.36 and $35.1 billion in revenue.

The stock is up sharply since reporting in April when F was trading at $12.5 - $13 per share. Although the estimates don't support the increase, the June auto sales of 16 million SAAR and the record run rate of truck sales, particularly the F-150, which is thought to be a higher-margin product for Ford, has boosted the shares (but not the numbers).

The March '12 quarter for F was relatively uneventful. The company got a $0.03 boost from a lower tax rate, and commodity cost pressure continued to pressure margins from expanding. North American margins were better-than-expected.

A note out of Credit Suisse dated July 3rd noted that the June auto sales SAAR (seasonally-adjusted annual rate) was a "meaningful step-up" in what was a fairly steady sales pace of 15.2 - 15.3 million since December, 2012.

So ... which measure has it right coming into earnings - the estimates which haven't changed much since April, or the stock price which was up 17% in the 2nd quarter alone, excluding the dividend, and is up 30% since 12/31/12 ?

Here are the cross-currents impacting Ford currently, as well as thoughts on valuation:

1.) Auto and Truck Sales: no question that the consumer spending on autos and trucks accelerated in Q2 13, and Ford even gained some market share. However it was the F-150 truck that really caught fire this Spring, '13, returning to sales levels not seen since Pre-Financial Crisis according to a graph out of Bespoke.

2.) Europe is a mess, as the table below details. Ford management has guided to a $2 billion loss in Europe this year, which amounts to roughly $0.50 per share for the auto giant. Europe is 20% - 30% of F's total auto sales and has not generated an operating profit since mid-2011. (See table below.)

There was a note out of Goldman last week downgrading all the auto stocks, after European auto data continued to be quite bad. Even Alcoa (NYSE:AA) on its conference call post-earnings on July 8th, noted the poor European auto market, having their worst May in 20 years per Klaus Kleinfeld (Alcoa CEO).

3.) The North America pre-tax auto margin: the shining star to Ford's turnaround is that the North American pre-tax Auto margin has moved to record highs in this recovery - at 11% in q1 '13 - and well ahead of the margins we saw in the middle of the last decade. The question is can this continue and can it continue to the degree that North American sales and margins offset global weakness ?

Ford's Financials by Region

Revenue Distribution by Region

3/13 12/12 9/12 6/12 3/12 12/11 9/11 6/11 3/11
North Am $22.3 $22.1 $19.4 $19.7 $18.6 $19.6 $17.9 $19.5 $17.9
Europe $6.7 $6.5 $5.8 $7.0 $7.2 $8.3 $7.8 $9.0 $8.7
South Am $2.3 $3.1 $2.3 $2.3 $2.4 $2.8 $3.0 $2.9 $2.3
Asia-Pac $2.6 $2.8 $2.7 $2.3 $2.3 $1.9 $2.3 $2.1 $2.1
Financial Serv $0.51
Total $34.4 $34.5 $30.2 $31.3 $30.5 $32.6 $31 $33.5

$31

* $'s in billion's

Pre-tax Income by Region:

3/13 12/12 9/12 6/12 3/12 12/11 9/11 6/11 3/11
North Am $2.4 $1.9 $2.3 $2.0 $2.1 $0.89 $1.5 $1.9 $1.8
Europe ($462) ($732) ($468) ($404) ($149) ($190) ($306) $176 $293
South Am ($218) $145 $9 $5 $54 $108 $276 $267 $210
Asia-Pac

$6

$39 $45 ($66) ($95) ($83) ($43) $1 $33
Fincl's $503 $341 $438 $456 $518 $605 $602 $706
Total $2.27 $1.3 $2.3 $1.88 $2.4 $1.24 $2.01 $2.95 $3.09

Revenue Distribution by Region:

3/13 12/12 9/12 6/12 3/12 12/11 9/11 6/11 3/11
N.Am 65% 64% 64% 63% 61% 60% 58% 58% 58%

Eur

19% 19% 19% 22% 24% 25% 25% 27% 28%
S.Am 7% 9% 8% 8% 8% 9% 10% 8% 7%
Asia 8% 8% 9% 7% 8% 6% 8% 6% 7%
Fin 1%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

Pre-tax income Distribution by Region:

3/13 12/12 9/12 6/12 3/12 12/11 9/11 6/11 3/11
N.Am 108% 141% 103% 101% 89% 72% 74% 65% 60%
Europe -20% -55% -21% -20% -6% -15% -15% 6% 9%
S.Am -10% 11% 0% 0% 2% 9% 13% 9% 7%
Asia 0% 3% +2% -3% -4% -7% -2% 0% 1%
Fin 22% 0% 15% 22% 19% 42% 29% 20% 23%
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

Profit Margin Trends by Region:

3/13 12/12 9/12 6/12 3/12 12/11 9/11 6/11 3/11
N.Am 10.95% 8.47% 11.98% 10.2% 11.47% 4.54% 8.65% 9.78% 10.3%
Eur -6.9% -11% -8% -5.8% -2.1% -2.3% -3.9% 1.96% 3.37%
S.Am -9.5% 4.7% 0.39% 0.21% 2.25% 3.9% 9.3% 9.2% 9.1%
Asia 0.23% 1.4% 1.7% -2.9% -4.1% -4.4% -1.8% 0.05% 1.5%
Fin
Total 6.6% 3.84% 7.46% 6.33% 7.87% 3.81% 6.71% 8.82% 9.95%

* Source: all of the above-data from Ford's quarterly earnings report or the 10-Q, 10-K.

Some observations from the tables:

North America is accounting for all the pre-tax operating profit for Ford today as of q1 13 (see Table 2). If the other regions simply break even and don't lose money, Ford could earn an extra $0.15 per share per quarter;

Per the European guidance on q1 13 of a $2 billion loss for full-year 2013, or $0.50 per share for 2013, even if Ford maintains the guidance, it would be perceived as a plus. So far at least, it doesn't look like the Europe loss will be increased on the conference call next week;

Note the pre-tax operating profit margin trend (last table) and the bottom row or the company operating margin. Ford traded up to $18 per share in early 2011, just as the total operating margin was 9.95%. North America is slightly better than that today, while Europe, South America and Asia- Pacific are worse. Can North America's margin strength offset Rest-of-World's (ROW) weakness ?

Don't forget Financial Services: with the bank and finance companies under attack by the Fed, Washington, and any regulator drawing a breath, Ford Motor Credit is still generating between 20% - 25% of all pre-tax income for Ford. Given how bank and financial earnings have gone for q2 13, expect Ford Financial Services to be a positive contributor to results;

Valuation:

Despite strong auto and truck sales and a North American margin recovery (last table above), the real issue with Ford at $16.75 - $17 per share, is the question whether it is overvalued at its current price, and what is "peak" EPS for the stock ?

F is trading at 12(x) current expected 2013 consensus of $1.43 per share and 10(x) 2014 expected consensus of $1.68 for expected y/y growth of 1.5% and 17% next year.

On a cash-flow basis, F is now trading at 10(x) 4-quarter trailing cash-flow and 12(x) free-cash-flow.

Normally, F trades at a 50% discount to both the SP 500 PE and EBITDA multiple, so with current 12(x) PE multiple on the stock, and the 10(x) cash-flow multiple, F appears expensive. However, that was a 1990s and 2000s valuation metric, with a North American per-tax auto margin peak near 7% - 8%.

One item that caught our eye on the cash-flow statement is that Ford is generating substantial free-cash today, much of it from Ford Financial Services. Just 20% of free-cash-flow is being returned to the shareholder via the dividend, with a share repo plan almost non-existent.

The point being that if F's operating metrics like margins continue to improve, maybe the shareholder will get rewarded with a bigger dividend and larger share repurchases.

Conclusion: Ford is in the midst of a remarkable turnaround, both in terms of quality and auto / truck sales, as it looks like American's are interested in owning Ford cars and trucks again.

The North American pre-tax auto margin is at a record as the company awaits stabilization around Europe and emerging markets.

Given what happened to gold and the commodity complex, and the continued pressure on steel prices (per Alcoa's call) investors might finally see some relief from commodity cost pressure at Ford.

Morningstar currently puts an "intrinsic value on Ford of $21 per share, which could creep higher if earnings and margins continue to improve.

"Peak earnings" are tough to forecast, but I would think Ford could earn at least $2 - $2.25 per share, which depending on the multiple, would put a fair value on the stock between $20 - $25.

Ford diluted shareholders with the 2008 Financial Crisis and has about twice the amount of shares outstanding at 4 billion, than at the end of 2008, with 2.2 billion fully diluted shares outstanding.

This is not the same company that saw a $36 share price in 1999, when Associates and Hertz and other subsidiaries were spun-off.

A trade into the low $20's would have us interested in being a better seller (all other things being equal) than a buyer. A trade back down to $12 would be a level where we would be very interested as a buyer.

We think the key metric continues to be the pre-tax automotive margin as well as the overall margin for the auto giant.

Here are some of our earlier articles on Ford, which are consistent with this article's conclusions.

Source: Ford Earnings Preview: Strong North America, Weak Europe - Whither Margins ?