Ford: Concerns About 2014 And Mulally Exit Create Buying Opportunity

Dec.19.13 | About: Ford Motor (F)

Investors in Ford (NYSE:F) are not too pleased with the company's outlook for 2014, with operating earnings expected to decline. This is on the back of high ramp-up costs related to product launches and increased price competition.

Added uncertainty regarding the future of CEO Alan Mulally as Ford's leader comes on top of that, triggering a rather violent sell-off in Ford's shares. In my opinion, the sell-off creates an excellent opportunity to pick up some shares in this quality name.

2013 Has Been A Great Year

Ford expects 2013 to be one of the best year's in its history, with earnings being driven by revenue growth and market share gains in all regions. Pre-tax earnings are seen around $8.5 billion, which is a very strong result as automotive revenues are seen up around 10% on the year.

But 2014 Outlook Appears Soft

Ford will move on with its One Ford strategy next year, launching the most vehicles in a single year in over a century. The focused strategy results in a stronger brand, better earnings and a stronger balance sheet.

In total, 23 new or significantly refreshed vehicles are being introduced around the world next year by the company, which compares to just 11 launches this year. What is very disappointing is that pre-tax earnings are seen between $7-$8 billion next year, down from $8.5 billion expected in 2013.

Sixteen launches are planned in the US. Slightly more unfavorable pricing due to smaller and medium size cars being introduced, more competition and higher costs related to the new models will take a toll on margins. As a result, operating margins for the North American business are seeing pressure, coming in between 8% and 9%. Yet Ford maintains that this will lead to better revenue and earnings opportunities post 2014.

South American operations are expected to break-even again, assuming a further depreciation of the Venezuelan Bolivar, while Ford notices that uncertainty in Argentina has risen as well.

The closure of Ford's facility in Genk will cut capacity by 18% in Europe and will occur by the end of next year. Higher launch and engineering costs are foreseen on the back the expected launch of 25 new vehicles in the coming five years.

Disappointing as well are similar levels of pre-tax profits in Asia despite strong market growth and the fact that Ford is gaining market share in the area. More competitive pricing, Ford's restructuring of the Australian business and start up costs related to model introductions are impacting earnings in this region as well.

Investors Bracing For Mulally's Exit

Ford's investors have applauded Mulally's leadership, who has created a ton of value for shareholders, making the company a leader within the industry while competitors like General Motors (NYSE:GM) and Chrysler needed a bail-out.

Signs and speculation that Mulally might make a move toward Microsoft (NASDAQ:MSFT) are increasing. The soft guidance for 2014 might create room for Ford to announce a new executive replacing Mulally, allowing the potential successor to start with a "clean" slate. Before joining Ford in 2006, Mulally worked for Boeing (NYSE:BA).

The fact that Ford declined to comment on Mulally's position seems to only add to the uncertainty about the role of its top executive, weighing on the stock.

Valuation

Back in October, Ford released its third quarter results. The company operates with $26.1 billion in cash and equivalents in its automotive business, while holding $15.8 billion in debt, for a solid net cash position. The financial unit of the firm operates with $11.5 billion in cash and equivalents while total debt stands at $94.5 billion.

Total revenues for the first nine months of the year came in at $110 billion, up 12% on the year before. GAAP earnings came in at $4.1 billion for the period, unchanged to the year before. At this pace annual revenues are seen around $150 billion as GAAP earnings could come in at $5.5 billion.

Trading around $15.50 per share, the market values Ford at $61 billion. This values Ford at 0.4 times annual revenues and 10-11 times GAAP earnings.

Ford's quarterly dividend of $0.10 per share provides investors with an annual dividend yield of 2.6%.

Investment Thesis

Ford has been a continued good news show over the last couple of years, but the guidance for 2014 is disappointing for investors. The additional costs incurred and pricing competition for its many vehicle launches are hurting short-term earnings in 2014. Ford stresses that these vehicle launches will pay off in 2015 and beyond.

According to Ford's investor presentation, the company made great progress as well with regards to its pension liabilities. The underfunded status of the plan has been cut nearly in half over the past year toward $10 billion. As a result, annual pension contributions are seen between $1 and $2 billion, down a billion compared to a year earlier. The strong credit and equity markets, combined with voluntary lump sum programs, improved the liabilities in a significant manner.

As such, the long-term prospects for Ford remain upbeat, driven by balance sheet improvements, a reduction in pension deficits and a growing global market share. The big product upgrades, notably in North America next year, will temporarily depress earnings but should not have a lasting impact going forward. This softness was disappointing to investors, especially in combination with the break-even guidance for the South American unit. On top of that came the uncertainty about Mulally's future at Ford which is weighing on shares following the update.

Back in October I last took a look at Ford's prospects following the release of its third quarter results. I concluded that Ford sees great performance under its "One Ford" strategy, driven by the solid performance in North America, while all other areas show sequential improvements as well. Important further improvements will have to come from Europe which is on track to breakeven in 2015, while Ford continues to gain market share in China.

The sell-off today therefore creates a nice buying opportunity with long-term trends being intact. Ford will be fine without Mulally which is more of a leader finding efficiencies based on a solid strategy, rather than being a true visionary. The strong financial position of the firm and the share price correction offers a great long-term buying opportunity, regardless whether Mulally stays or not.

I continue to see better days ahead for Ford.

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