Ford: Still Stuck In Low Gear

Jul. 8.12 | About: Ford Motor (F)

Ford Motor's (NYSE:F) shares have fallen sharply this year, as the European crisis has begun to play out. Shares of Ford are down 24% since my March 26th, 2012 article, "Why Ford's Stock Will Stall in 2012". In the article I warned of a lack of positive catalysts and multiple worries, including: high oil prices, possible retirement of key executives, and the European crisis worsening. Since the article, oil prices have moderated and the European crisis has worsened. U.S. car sales have continued to be solid, offsetting the poor performance overseas. Shares of Ford are cheap and should remain that way for the rest of the year, as new positive catalyst are few and far between.

The European crisis continues to make front-page headlines every day. In 2011, Ford derived 26% of the company's sales from Europe. Looking at monthly "Euro 19" sales from Ford Motor, which is released in the middle of each month, the sales trend continues to worsen.

"Euro 19" Sales y-o-y Change
January -4.95%

February

-8.30%
March -7.90%
April -11.50%
May -11.90%
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This will continue to be the main drag on Ford until these sales numbers begin to post smaller y-o-y drops. As soon as Europe's crisis starts to abate, shares of Ford will spring back to life. Unfortunately, it'll likely take until January or February of 2013 at the earliest for the "Euro 19" y-o-y comps to start to improve meaningfully.

On June 28th, Ford's CFO, Robert Shanks, said that international losses would triple in Q2 over Q1, implying an international loss of $570M. Ford continues to say U.S. sales will remain strong and will help mitigate the losses from their international business. The problem is that analyst estimates continue to decline. For the most part, growth and momentum traders will shy away from investing in companies where analyst estimates are declining. So, until Europe turns for the better, these estimates will continue to be lowered further.

Despite the tepid U.S. recovery, U.S. auto sales continue to show strong results. Ford, General Motors (NYSE:GM), and Toyota (NYSE:TM) have all reported strong sales in June and for the full year. In fact, car sales in the first 6 months of 2012 have been the strongest sales pace since 2008. The problem is investors aren't surprised by these numbers, as they have already been baked into the share price of all 3 auto makers. Currently, investors are in the midst of pricing-in the European crisis.

On the bright side, gas prices continue to abate from their spring highs after oil prices tumbled in May and June. The national average for a gallon of gas has dropped from $3.90/gallon to near $3.35 since April 1st. This price drop should stimulate sales of larger trucks and SUVs, helping the bottom line of Ford and General Motors in the United States.

Bottom line: Ford remains cheap, but without a major positive catalyst in the near-term shares will continue to languish. Just because a company is cheap, doesn't mean it can't stay cheap or get cheaper. Ford trades at just 7x 2012 expected earnings and now has a 2% dividend yield. Earnings estimates have continued to be slashed over the last 3 months and this will likely continue as Europe's car sales continue to weaken. When the European sales start to turn more positive for 2-3 straight months then Ford's share price will start to head higher. This catalyst is unlikely to happen until the 1st half of 2013. So between now and then, I continue to suggest you sit on the sidelines or invest your money elsewhere.

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

DISCLAIMER: This article is intended for informational and entertainment use only and should not be construed as professional investment advice, but rather my opinions as a writer only. Always do you own complete due diligence before buying and selling any stock.