Last Friday, Ford (F) reported earnings of $13.62 billion, or $3.40 per share, which fell slightly below Wall Street's expectations. To put these earnings into prospective, last year's fourth quarter earnings were $.05 per share. Though it is important to take note that earnings would have been only $.20 if accounting changes were not made, the company still managed to boost earnings by 400% on a conservative measure. Ford also reported profits of $8.8 billion in 2011, which mark the company's most profitable year since 1999. Ford has had 11 strong quarters of earnings and profit margin growth. What is of the upmost importance for future earnings and growth are plans that Ford CEO Alan Mulally has:
I think that we have a great plan in the United States and Europe and also a tremendous growth plan in Asia-Pacific that's just coming on line now.
For a multitude of reasons (below), Ford is poised to have an exceptional 2012 and grow its business into the future. In several years, Ford may prove to be a strong buy at a much higher price.
Five reasons Ford is poised to be worth your money:
Dividend: In March, the company is planning to reinstate a quarterly dividend that will yield investors $.05 per share. This is a very bullish move on behalf of Ford and marks a paradigm shift from the company being looked at as recovering to thriving. The graphic below illustrates that the expectation the dividend is expected to have a slight move toward the upside in the coming years. Although earnings per share projections are expected to decrease in 2012, the company is looking towards stable and steady increases in EPS into 2013. This will result in modest increases in the company's quarterly dividend.
- The company reinstating its quarterly dividend has positive effects on the stock's performance, because investors clamor to companies that pay an income. For example, Berkshire Hathaway (BRK.A) has "27 of [its] 33 stock holdings that pay cash dividends." This gives tangible evidence to the fact that a company paying a dividend is more appealing than one that is not, and investors take note.
Paying off debt: Ford has managed to pay off debt at a record rate over the past two years, and this gives the company a strategic advantage compared to others with higher levels of debt. Lewis Booth, Ford CFO, stated that the company is only holding $13.9 billion in debt and has paid off $6 billion since 2010. The company is also planning on paying off an additional $3.5 billion in the coming year. For Ford, this marks an opportunity to utilize its leveraged capital to create new and innovative products into the future. As the only US automaker to not need to $80 billion government bailout program in 2008, this marks a great deal of success on the company's behalf.
Industry Ready for Growth: The Associated Press reports that American automakers are poised to see demand of 14 million units. This would be the first in many years that car sales would be considered indicative of a healthy economy. AP also reported that:
US auto sales peaked at 17 million in 2005, when Detroit's automakers were much bigger and overproduced cars that they were forced to discount heavily. Sales could eventually reach that level again around 2018, Schuster said, because of 70 million so-called millennials born between 1981 and 2000 who need to set up households and buy cars.
For Ford, this means a landscape for both growth in both units and profit. Over the past quarter, Ford has outpaced General Motors (GM) in the wake of its restructuring plan. Though Chrysler has seen astronomical growth, it is in large part due to the depressed state the company fell into in 2008. This uptick in demand for automobiles in 2012 and beyond will place Ford in a position to grow market share and earnings.
Strategic Business Model: About four years ago, Alan Mulally implemented a simple, but inspiring program to bring the company's line of 97 different models down to around 30 called OneFord. "Fewer brands means you can put more focus into improving the quality of engineering," says Mulally in a Bloomberg report. This is a model that got a lot of hype when it was revealed, but skeptics (like I would be), said that until results are tangible, do not buy into the hype. Today, the fruits of Mulally's work are coming to fruition in the form of record profits in the face of an uncertain economy. This plan sets Ford up for sustained profitability, and if the economic conditions are just right, a boom into the coming years.
Analysts Sentiment: In the wake of Ford's fourth quarter earnings, analysts have been reflecting on the automakers prospects. Several key themes have come out of the analyst's reports:
- Pension Plan: Itay Michaeli, a Citigroup analyst, stated that Ford's pension plan could be fully funded by 2015, and that with $9 billion in free cash flow, the company could be worth far more than its current value. These actions, he claims, "improv[e] the prospects for a return to investment grade."
- Growth: Forbes reports: "RBC sees continued growth in the North American segment that was up 15% in 2011, at a time when production in Europe and South America was down and the global economy slowed."
Though times in the economy: If the economy were to enter another recession, Ford would see demand decrease, and this has the potential to throw off the company's long-term goals. Though Ford may be the best positioned to enter a down economy, the auto industry does not provide protection from a recession due to the direct consumer relationship.
Foreign automakers: In the wake of the Japanese earthquake and Toyota's slip on quality, retailers like Honda and Toyota have taken a significant hit in market share. Some have attributed this to the rise of Ford and warn that if foreign automakers come back with a bang, domestic companies could be in for a surprise. This does not seem to be occurring at the moment, but it marks something to keep in mind in the future when holding Ford.
Conclusion: Due to Ford's ability to perform over the past several years, cut costs, drive revenue/profit and build a strategic business model, Ford has an exceptional opportunity to take advantage of the growing demand for automobiles. If Ford plans for 8-10% profit margins by mid-decade come to fruition, Ford could see profitability rise to its 1990s levels when the stock was trading at between $50 and $60 (C Analyst). For these reasons, F is in a stable position to grow and meet the demands of customers around the world.