Ford (F) is one American success story to be admired. While the sluggish summer economy saw the stock move back down, it has rebounded in the last 6 weeks and now looks set to continue higher. There are some positive factors in Ford's court that make it the probability of an extended bullish run look possible!
Third Quarter and into 2014
Ford is doing just as expected in the third quarter and about parallel with the second quarter. North America remains the foundation while Europe remains the problem. But on a brighter note, analysts believe Ford is making progress on the cost component of its European turnaround plan. And its projections into 2014 suggest continued growth and fair margins for the company. With operating margins over 10%, it has one of the highest in North America. The turn around in Europe will require a heavy product component that the company recently unveiled.
As for losing money in the region of Europe, the company is cutting hundreds of salaried workers by offering buyouts, cutting temporary positions, and outsourcing services. In Europe, sales are down by 7% this year. It lost $404 million in the second quarter and losses are expected to top $1 billion this year. It is also exploring plant closures and other cost cutting measures and it is important to know that turning around Europe will take time.
It has been hard but it seems the company is doing all it can to turn things around there, it will just take time. On a brighter front, a possible production stifling strike is not even in the picture for the Canadian Auto Workers union, who overwhelmingly approved a new four-year labor agreement with Ford Motor Co. during a series of ratification meetings. It was an overwhelming vote for, with 82% agreeing. The original struggle was over labor wages. It costs more to make a car in Canada than anywhere in the world. The negotiations brought wages closer to the U.S. model. This is good for Ford and helps things continue smoothly.
As I observe the movement in Ford's stock, I am reminded of a cup and handle pattern. It can be a bullish continuation or reversal pattern where the formation resembles a "cup with a handle to its right. In this particular instant, it looks like the handle of the cup is still being formed. In this case it looks like a reversal pattern. I would not be surprised if we find the 50 day MA becoming the support for the movement of the stock pretty soon. The over bought position showed more strength on the last challenge of the resistance level. With the fourth quarter traditionally bullish, I would not be surprised to see the stock move up from this point on.
The Options play
The stock is presently trading at 9.86 and if the formation stands, it will eventually move above 10 and into 11. I think I would chose to pick up a smaller profit on an income play on Ford, only because it moves slowly. For this reason I am thinking I would buy out of the money now and look for a January move above 10 closer to 11.
- Buy a January 2013 call with a strike of '10' (priced at $0.49)
- Sell a January 2013 call with a strike of '11' (priced at $0.18)
- Net Debit to start: $0.31
- Maximum Profit: $0.69
- Maximum Risk: net debit
- Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Stock formation looks like a longer term bullish pattern.
- Robust 2013 & 2014 sales figures
- Fourth quarter is traditionally bullish