As Ford Tanks, Now Is the Time to Fill Up

Includes: F, GM, TM
by: The Keating Letter
Ford (NYSE:F) fell 13% on Friday after the company disappointed analysts with lower than expected earnings. It appears there was an expectation misunderstanding between analysts and the company. Ford indicated it was happy with results, which were 30 cents per share versus the 48 cents per share estimates. Two factors contributed to the expectation miss: Ford had higher product launch costs and higher commodity costs.
Commodity costs were uncontrollable and lacked visibility. On the higher product launch costs, though, CFO Lewis Booth said that earlier in the year the company had indicated costs would be up because of the development and marketing of new brands. Those investment costs should come back to the company in the future. Analysts seemed blindsided, but this quarter shouldn’t change Ford’s profit trajectory.
This is a classic case of short-term investors getting out, and is a buying opportunity for those investors who are patient enough to harvest the results from the new products. Even long term is relative. These new models will begin paying dividends within two quarters. It shouldn’t take too much patience to wait six months, but many of the hedge funds and other institutional investors who bailed are sitting on large gains from the last year and used this as an opportunity to take some profits. Heck, before the drop on Friday, Ford had gone up 50% just since September. The easy money certainly has been made, but that’s the case for most stocks in today’s environment.
The problem with a company like Ford is that it became a bit of a high-flyer. It made smart decisions and raised capital at the right time in order to avoid a bailout, but now the company has to compete with a revitalized GM (NYSE:GM) who was able to shed a lot of its liabilities. The competition really isn’t fair when you’re competing against Toyota (NYSE:TM), which doesn’t have the union costs, and a bailed-out GM. Although Ford is surely glad it avoided the GM situation, it is ultimately being punished for doing the right thing.
Anyway, back to Ford being a high-flyer. In early 2009 when it became clear that Ford was on the right path, expectations rose once Ford started reporting quarterly profits. In essence, this quarter was a return to normality and a return to a historical operating environment. Sales were up, prices were up, and costs were up.
A few factors to take into consideration: U.S. market share continues to climb and sales across all brands should continue to increase in the U.S. Ford was recently upgraded by Fitch and will soon be upgraded by Moody’s, reflecting Ford’s debt reduction efforts over the last year. Ford now has more than $1 billion more cash on hand than debt. Who in 2007 would have guessed that you could make the statement in 2011 that Ford’s balance sheet is incredibly strong?
Full year operating earnings are still $1.91. Management sounds bullish on the future. The economy is continuing to gain strength and U.S. auto sales are still well below normal. Taking all this into consideration, an 8 ½ PE is too low. This doesn’t take into consideration the fact that annual U.S. auto sales are still probably 25% less than they should be. Any increase in U.S. sales should go right to Ford’s bottom line. With Ford’s strong balance sheet, smart product investments, and stable earnings outlook, my guess is that a floor has been put in the stock price and it should be a safe investment going forward if you’re able to get in at these prices.
One other thing, management said they would work with analysts to ensure that miscommunication wouldn’t affect future earnings estimates. My advice: Forget about the analysts and focus on running the business.
Investors simply need to focus on Alan Mulally’s ending quote from the conference call: “2011 will be even better than 2010.”

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