by Robert Gordon
In this article, I am going to take a look at Midwest manufacturing concerns. These companies are sensitive to interest rates, consumer sentiment and macro-economic conditions. As such, these sorts of companies are fine proxies for the economy at present.
Ford Motor (F) is North America's number two automaker, and something of a folk hero in Michigan, as it was the one auto company that refused government assistance in the last recession. Instead, it mortgaged everything from its real estate to its blue oval logo. While that strategy left the company deeply indebted and at a disadvantage to companies such as General Motors (GM), that had received government largess and had its balance sheet cleaned up in a bankruptcy, Ford simply has soldered on, more or less successfully. Its recovery from the brink is attributable to former CEO Bill Ford's wisdom in firing himself in 2006, and bringing in then Boeing (BA) CEO Alan Mulally and team to run Ford.
In its first quarter of 2012, Ford posted earnings of $1.4 billion, or $0.35 per share. The earnings amount matched analysts' expectations. If one excludes "one time" items, the earnings number would have been $0.39 per share. In the year ago quarter, earnings for the company were $2.55 billion, or $0.61 per share. The poor comparison versus a year ago was due to a combination of the loss of a tax benefit that was in place a year ago, along with lower sales outside North America. Revenues for the quarter fell slightly to $32.4 billion from $33.1 billion a year ago.
Looking past the short term issues of earnings, and I see much about Ford I like. I do not foresee the mild sales slump to continue, as Ford posted its highest sales in five years across its entire business in the month of March, a 5% increase from the month of March, 2011. The monthly sales report included all-time highs for models including the Ford Focus and Ford Fusion. Ford's best-selling vehicle, its F - series trucks, was up 9% year over year. I see the momentum from these new and refreshed models continuing.
Perhaps the biggest news for Ford this week was not its earnings; rather, it was the welcome and wonderful news that after years in a financial quagmire, Ford received investment grade credit ratings from Fitch. It was the first time any ratings agency had issued an investment grade rating since 2005. When either Moody's or Standard and Poors likewise raise ratings for Ford, it will allow the company to refinance some of its higher cost debt at better interest rates. While on the subject of debt, Ford continues to slash it. As recently as 2010, Ford held some $34 billion of automotive debt. By the close of the first quarter of 2012, that debt level had come down to $13.7 billion. Automotive cash on hand is $23 billion.
Ford's legacy costs had been a major issues that weighed on Ford during the lean years. In 2007, the company was able to offload retiree healthcare costs to a UAW trust. With the earnings report, Ford has a plan to deal with its over $15 billion of underfunded pension liabilities. It will be offering lump sum pension payments to non-union employees and retirees in lieu of monthly payments. I have no idea how many will accept the plan, but if a substantial percentage do, it will allow Ford to make the one-time payments at a time it can afford to do so.
Ford is the most creative and best-managed company of its type, and even now pays a modest dividend yield of 1.7%. While I like GM, Ford has put itself into a position where it can make profits in good times and not so good, something that could never before have been said about the auto industry in the post-world war II era. Ford's 12 month target price of $16.08 is a 37% premium to today's price. Ford is a winning intermediate to long term holding.
The pride of Wisconsin, Harley-Davidson (HOG), had a rocking first quarter of 2012, with revenues up 17% to $1.43 billion, whereas Wall Street was expecting $1.22 billion. Profits came in at $172 million, or $0.74 per share, two cents above Wall Street expectations. The profit was 44% higher than the first quarter of last year.
Harley is benefiting from a recovering domestic economy, enhancing worldwide reputation, and a mild winter in the Northeast third of the United States did not hurt either. In light of the tremendous quarter, the average analyst forecast for second quarter earnings was raised from $0.71 to a current $0.95. Those same analysts have a bullish, 1.8 mean rating on the stock.
Harley's 12 month target of is just 4% above the current price. But Harley machines will never go out of style, and its stock stands to gain substantially over the next three to five years. I urge growth investors to look into it.
Ohio's Dana Holdings (DAN) has been among the slowest of the major tier one automotive suppliers to recover from the recession. It finally showed some real life in the first quarter of 2012, posting a profit of $62 million, and after preferred share requirements, profits came to $0.33 per share. If we exclude one-time events, profits came to $0.44 per share. This reversed a $38 million loss in the first quarter of 2011. Sales were up over the year earlier quarter by about 10%, to $1.98 billion.
Dana's revenue and profits both exceeded analysts' expectations for the quarter, which were for $0.41 per share in profit, and $1.91 billion in revenue. Dana's commercial side and its off road side contributed fairly equally toward the advance, and the company's stock rose nearly 10% on the day of the announcement.
Dana is still a little too speculative for my taste. Yet it may be of interest to risk tolerant investors. It has a mean analyst rating of a bullish 1.9, and a twelve month price target of $21.10, some 44% above its current level.