A Profit Speed Bump Won't Keep Ford From $20

Apr.25.14 | About: Ford Motor (F)

Summary

Investors should be pleased with the company's direction, even though the stock's direction went the other way.

A lot was made ahead of the report and the perceived importance of one quarter, but it wasn't the "let down" that some are making it out to be.

On the basis of continued overseas market share growth, I'm going to maintain my fair value target of $20, which I project will be reached by year's end.

Shares of Ford (NYSE:F) are trading down more than 3% following the company's disappointing earnings results Thursday. Some are being generous and calling the results "mixed." While Ford drove sales higher, topping Wall Street's expectations, there are now worries that the company's ability to deliver on the bottom line has come to a screeching halt.

While Ford's recent success drove expectations higher, the lower-than-expected profit was due to (among other things) adverse factors like higher warranty costs and bad winter weather. And we know the weather has impacted virtually every sector. So it's not yet time to get carried away.

The Detroit automaker reported first-quarter revenue of $35.9 billion, which was a modest 0.3% increase from the year-ago quarter. Even more important, this was enough to beat consensus estimates of $34.5 billion. What concerned analysts was the company's after-tax net income of $989 million, which represented a 39% year-over-year decline. But here's the thing; heading into the quarter, no one was expecting any miracles. In fact, the majority of the analysts were rushing to cut estimates in anticipation that profits would decline. Now everyone appears stunned. It doesn't make sense.

What's more, when you consider that the profit of $989 million includes a $122 million special charge related to restructuring in Europe. The results doesn't appear so bad. Excluding special items, the profit came in at $1.4 billion, which, on a per-share basis, amounted to 24 cents. This was 6 cents under analysts' estimates. While this does sound like a wide miss, there are a number of factors that impacted this quarter.

First, while I've already cited the adverse weather, which impacted revenue by roughly $100 million, Ford also had to deal with higher warranty costs for older vehicles, which resulted in a $400 million charge. And when you factor the negative foreign exchange impact on its South American balance sheet, combined, there was almost $1 billion in charges on the company's operations, which ate up almost 17 cents per share in Ford's results.

The question is, whether these issues were an anomaly or are they a part of a troubling trend?

Given that management reaffirmed prior guidance, investors shouldn't expect a repeat of this performance. Ford said it expects to achieve full-year pre-tax profit of $7 billion to $8 billion, which the company projects will be helped by the planned launch of 23 new vehicles this year. During the announcement, CEO Alan Mulally said:

"We had a solid quarter, and we are on track with our most aggressive product launch schedule in our history. Our One Ford plan continues to deliver as we serve customers in more markets around the world with a full family of vehicles committed to best-in-class quality, fuel efficiency, safety, smart design and value."

I've said this before, Mulally, has a strong pulse on this company. Although a lot was made ahead of the report about the perceived importance of this quarter, I don't think it was the "let down" that some are making it out to be. Investors shouldn't discount how well Ford performed in global sales volumes. The 6% global gain was 2% ahead of most estimates. Not to mention, Ford is showing that it can continue to grow market share in areas like Asia Pacific, which saw 32% volume growth. And given the 45% volume surge in China, which led to 1% gain in market share, I don't see how this quarter can be considered a disaster.

Investors should be pleased with the company's direction, even though the stock's direction went the other way. This quarter notwithstanding, Ford remains a top-notch automobile company that is well positioned to sell more cars than any other manufacturer. On the basis of continued overseas market share growth, I going to maintain my fair value target of $20, which I project will be reached by year's end.

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

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.