Ford Earnings Preview: Stock 30% - 35% Undervalued; Hold For 2015 Growth

| About: Ford Motor (F)

Summary

Start-up or launch costs crushed 2014 EPS estimates.

Europe improving.

Think intrinsic value closer to $23 - $25 per share.

Ford Motor (NYSE:F) reports before the opening bell on Friday, April 25th, 2014.

Analyst consensus for Ford's Q1 '14 per Thomson Reuters, are expected at $0.31 in earnings per share (EPS) on $34.12 billion in revenues, for expected year-over-year declines of 24% in EPS and a drop of 5% in revenues.

This will be the first year-over-year declines in Ford's revenues and EPS since September, 2012.

Both EPS and revenue consensus for Q1 '14's estimates have remained stable since January's Q4 '13 earnings report.

When Ford reported Q4 '13 earnings in January '14, the tax rate added $0.03 per share, and pension under-funding fell to just $2 billion from $4 billion for all of 2013. Europe was weaker than expected too. All in, Q4 '13 with the horrid guidance wasn't a great quarter, and the stock is still recovering.

On December 18, 2013, F shocked the Street and investors with its 2014 EPS guidance, reducing expected 2014 pre-tax profit from $9 billion to range of $7 - $8 billion, thanks primarily to launch costs around new North American models.

Historically Ford has a habit of shocking the Street, as they did in late 2012, early 2013, when the guided to a $2 billion pre-tax loss for Europe for calendar 2013, when the actual number came in at a loss of $1.6 billion, and I thought even $1.6 billion was extreme.

Revenue distribution by region 6/30/2014 3/31/2014 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011 6/30/11 3/31/2011
North America n/a n/a 60% 64% 62% 65% 64% 64% 63% 61% 60% 58% 58% 58%
Europe n/a n/a 19% 19% 21% 19% 19% 19% 22% 24% 25% 25% 27% 28%
South America n/a n/a 7% 8% 8% 7% 9% 8% 8% 8% 9% 10% 9% 7%
Asia / Pacific n/a n/a 9% 8% 8% 8% 8% 9% 7% 8% 6% 8% 6% 7%
Financial services n/a n/a 6% 0% 0% 1% 0% 0% 0% 0% 0% 0% 0% 0%
Total revenue n/a n/a 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Pre-tax income (by region) distribution n/a n/a
North America n/a n/a 116% 84% 84% 108% 141% 102% 101% 89% 72% 74% 65% 60%
Europe n/a n/a -39% -8% -13% -20% -55% -21% -20% -6% -15% -15% 6% 9%
South America n/a n/a -9% 6% 5% -10% 11% 0% 0% 2% 9% 13% 9% 7%
Asia / Pacific n/a n/a 7% 5% 6% 0% 3% 2% -3% -4% -7% -2% 0% 1%
Financial Services n/a n/a 24% 14% 16% 22% 0% 16% 22% 19% 42% 29% 20% 23%
Pre-tax profit by region / segment n/a n/a 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Profit margins by region 6/30/2014 3/31/2014 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011 6/30/2011 3/31/2011
North America n/a n/a 7.56% 10.64% 10.37% 10.95% 8.47% 11.98% 10.20% 11.47% 4.54% 8.65% 9.78% 10.30%
Europe n/a n/a -8.04% -3.50% -4.61% -6.90% -11.26% -8.03% -5.76% -2.07% -2.29% -3.93% 1.96% 3.37%
South America n/a n/a -4.67% 5.64% 5.01% -9.48% 4.68% 0.39% 0.21% 2.25% 3.86% 9.26% 9.21% 9.13%
Asia / Pacific n/a n/a 3.21% 4.43% 5.80% 0.23% 1.39% 1.69% -2.93% -4.13% -4.37% -1.83% 0.05% 1.57%
Financial services n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
n/a n/a 3.88% 8.13% 7.65% 6.60% 3.84% 7.53% 6.33% 7.87% 3.81% 6.71% 8.82% 9.95%
Production /unit count 12/31/2013 9/30/2013 6/30/2013 3/31/2013 12/31/2012 9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011 6/30/2011 3/31/2011
North America n/a n/a 760 751 820 784 735 674 736 677 675 655 709 615
Europe n/a n/a 318 323 401 386 340 205 360 372 301 367 322 332
South America n/a n/a 135 125 134 111 116 117 119 118 124 133 135 114
Asia / Pacific n/a n/a 397 348 313 286 302 258 250 217 219 214 226 242
Total unit production / sales n/a n/a 1,610 1,668 1,668 1,567 1,493 1,254 1,465 1,384 1,319 1,369 1,392 1,303
seq growth n/a n/a -3% 0% 6% 5% 19% -14% 6% 5% -4% -2% 7%
y/y growth n/a n/a 8% 33% 14% 13% 13% -8% 5% 6%
Click to enlarge

* Table source: internal spreadsheet

As the reader can quickly see, North America is currently accounting for all of F's pre-tax income by region. With just modest improvements, i.e. breakeven in Europe, from a $1.6 billion loss, F would add $0.40 to annual EPS.

EPS y/y gro Rev's y/y gro
2016 (est) $2.08 +9% $155.6 4%
2015 (est) $1.91 +41% $149.4 7%
2014 (est) $1.35 -17% $140.0 0%
2013 (ACT) $1.62 +15% $139.4 10%
Click to enlarge

* Source: Thomson Reuters estimate detail from internal spreadsheet

Two other positives around the stock for patient investors:

1.) GM's (NYSE:GM) headlines problems can only be a positive for Ford, although I do think both OEMs are making better quality cars post 2008;

2.) Ford currently sports a 70% free-cash-flow yield, thanks to continued strong cash-flow and free-cash-flow generation. Ford is currently returning just 40% of total free-cash to shareholders, although if we look at just auto free-cash, 150% of auto free-cash-flow is being returned to shareholders.

Finally, in terms of intrinsic value, our internal earnings-based model values Ford at close to $17 per share, while Morningstar assigns a perceived intrinsic value to F of $26 per share. Average the two and you get $22 - $23 per share.

Our own internal valuation model normally assigns a higher valuation estimate than Morningstar although in the case of Ford, our model is lower than Morningstar. Part of that I suspect is the drop in F's 2014 EPS estimate from $1.83 in mid-December '13 to $1.34 today (see above table).

F's March auto sales rose 3%, and February's auto sales fell 6%, and January's sales fell 7%. European sales did improve low double-digits in February '14, outpacing the industry's 8% growth.

To conclude, Ford's North American segment is still the 800 lb gorilla in the plant, and presuming Ford's launch cost guidance was UPOD (under promise and over deliver) we expect a better 2nd half of 2014 and the stock.

Note the 2015 EPS and revenue estimate growth. If those numbers continue to remain stable to improve, that could be a good catalyst for the stock.

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.