Earnings Shocker: Ford and Mulally Turn a Profit!

Ford Motor Company (F) recorded a stunning $100 million first quarter profit, in stark contrast to the first quarter a year ago where the company lost $282 million. The results were far in excess of what Wall Street expected which was somewhere in the neighborhood of a $400 million loss. The surprise profit was achieved at a time where the domestic auto market was especially soft, and the sales of models that had generally provided the most margins—namely big trucks and SUV’s—were especially soft with gas prices on the rise. The plan of new CEO Alan Mulally, dubbed the “Way Forward,” has revitalized Ford in 19 short months and enabled them to not only beat estimates but make a profit in a particularly challenging market climate. He maintained that Ford was still on pace to be profitable over the year of 2009, which would be truly impressive as the company lost $2.7 billion last year and $12.6 in 2006.

Alan Mulally took the reins at Ford in late 2006, and he had a tough task ahead to turn around the struggling auto maker. Immediately after Mulally’s began at Ford, he embarked on an aggressive cost cutting strategy. The cost of labor and employee benefits had long plagued the U.S. auto industry, but it was unclear if the proposed measures would indeed succeed. The buy-outs that Ford offered employees were a source of lowered costs, even though not as many employees accepted as management had hoped. Layoffs are still a possibility if Mulally deems it necessary. Amidst the cost cutting, Ford also strived to improve quality control on their products and suppliers in an attempt to raise the perception of the brand. The company’s North American business was much improved as it lost just $45 million compared to $613 million in the quarter last year.

Perhaps the focus on international growth has been the most successful part of Mulally’s “Way Forward.” The European business segment was an exceptionally bright spot as profits more than tripled, and South American profits more than doubled. The increased profitability is a result of increased focus on building cars that are better suited for those markets, and the decline of the dollar versus foreign currencies obviously didn’t hurt.

As a value investor, there have been times where Ford has looked undervalued but the risks were so substantial that it was not a justifiable “Buy.” After the 11% advance today, Ford is priced within its historically normal range when compared to average sales and cash flow levels. Given the current performance we calculate a normal range of $8-$12. We are confident with our Ockham rating of Hold on the shares, but if Mulally can continue to guide the company in the right direction they may be worth taking a risk on.

Disclosure: None