Seeking Alpha
Long only, deep value, value, long-term horizon
Profile| Send Message|
( followers)  

Summary

  • Ford remains a top-notch automobile company that is well positioned to sell more cars than any other manufacturer.
  • Although analysts have a high target of $22, I need to hear more color on the conference call about improvement is Europe and China before I get too bullish.
  • For now, I'm content with taking a position and waiting it out for the long term.

It's a little surprising that Ford (NYSE:F), which is known for its high-speed muscle cars, is having a hard time doing $20 with its stock. I say "surprising" because I don't believe there is another company in the market that has performed better than Ford over the past several years. The job that CEO Alan Mullaly has done with the company is nothing short of remarkable.

I would call his performance a "miracle," but this would suggest that it was unexpected. The fact is, when he took over the beleaguered auto company, anyone who knew Mullaly's pedigree assumes it was a matter of "when" not "if" he would turn things around. Despite his efforts, Mullaly, who was also rumored to take over Microsoft (NASDAQ:MSFT), will likely leave Ford without the stock performing as well as his company.

While Ford has been - without a doubt - the model of what can happen when vision meets strong execution, investors remain frustrated about the lack of movement in the share price. Now with first-quarter results due out Friday, these shares still seem miles away from $20. This is even though on a dollar basis, the distance is less than 3. This question will certainly be answered on the conference call that follows.

Some of the pessimism that has plagued Ford has been the company's declining profitability. So on Friday, analysts expect yet another decrease -- this time the Street is looking for a decline of close to 22% to 32 cents per share. Last year, Ford reported a profit of 41 cents. Pessimism has grown over the past three months, as the estimate has dropped 3 cents since the January quarter. The good news is, estimates have remained steady over the past 30 days. For the fiscal year, analysts are expecting earnings of $1.35 per share, or down 17% year over year.

In terms of revenue, analysts will be looking for a 5% year-over-year decrease to $34.06 billion for the quarter. Recall, last year, Ford posted revenue of $35.81 billion. For the year, revenue is projected to come in at $140.42 billion, which will represent a year-over-year increase of less than 1%.

As bad as these numbers appear, they are in no-way close to the depths Ford had reached prior to Mullaly's tenure. Consider, even though profits have decreased, Ford nonetheless has posted a profit in each of the past eight quarters. So these numbers should be kept in context. And it's not as if Ford is being outmuscled by General Motors (NYSE:GM) or even Tesla (NASDAQ:TSLA), which has taken the lion's share of the press within the auto sector.

So what will drive Ford to $20?

First, the obvious; the uncertainty surrounding Mullaly's departure won't help. But on Friday, Ford will need to exceed every meaningful metric, which I believed should propel the stock north of $17. To the extent management can avoid some "road hazards" in Europe and China, the stock may drive by $20 before the end of the year.

Recall, while the company has shown some recent struggles in Europe, management has been able to offset this weakness with better-than-expected performances in China and North America. So if Europe can make a turn for the better that should be encouraging. To that end, the company's earnings guidance will also weigh heavily on how fast the stock gets there.

To that end, I don't want to exaggerate the importance of one quarter. But given the situation around Mullaly and the downbeat results of General Motors, there are a lot at stake here. But if Ford can beat on the bottom line by, say, 2 cents, which would put the company on track for a final-year beat, the stock may reach $20 before the July quarter. But those are some big "ifs."

For now, I'm content will taking a position and waiting it out for the long term. Ford remains a top-notch automobile company that is well positioned to sell more cars than any other manufacturer. With the stock trading at around $17, I project fair value to reach $20 by year's end. According to analysts, the high target is $22. But I need to hear more color on the conference call about improvement in Europe and China before I get too bullish.

Source: Can Ford Do $20 On The Profit Highway?