Ford Continues To Outperform; Shares Are Still Undervalued

| About: Ford Motor (F)

On October 30th, Ford (NYSE:F) announced its quarterly earnings. The company earned $1.63 billion, which equates 41 cents per share in the quarter, beating the average analyst estimate of 30 cents per share, mostly due to record demand in North America, while the company posted a large loss in the continent of Europe. This was the 14th quarter in a row where Ford posted positive profits.

Compared to the same quarter last year, the company's profit was unchanged. The company's profits are very high in Northern America which is partly offset by the losses in Europe. In North America, the company's quarterly profit grew by nearly 50% compared to the same quarter last year, as it grew from $1.6 billion to $2.3 billion. In addition, the company's North American business currently enjoys the highest margins (operating margin of 12.1% compared to 8.6% last year in the same period) in more than a decade. This was helped with lower incentives spending and higher average sale price. The company is hoping to control costs in Europe in order to meet the current demand for its cars, which is the lowest in 20 years, as it is very difficult for Europeans to obtain credit to buy cars due to the issues with European banks and governments. The company's revenue fell from $33.1 billion to $32.1 billion. Again, Europe was the culprit in t he decline. According to the company's earnings report, it doesn't expect to return to profitability in Europe at least until the 2014 or 2015.

The company's guidance for the full year was mostly positive with the exception of Europe. The company expects to post record profits in North America and to remain profitable in South America. In Europe, the company reiterated the last quarter's guidance, saying that it would post an operating loss of $1.5 billion in the continent for the full year. Part of this will be due to one-time restructuring costs such as closing a number of production plants and launching some new products. In Asia and Africa, the company predicts to post a small loss around $50 million, in line with 2011. In addition, Ford Credit is expected to post a profit of $1.6 billion for the full year. The company's profits in North America and South America are expected to easily make up for the losses elsewhere.

Ford expects to sell 14.7 million units of cars in North America for the full year. The earlier guidance was between 14.5 million and 15 million units. Excluding the Ford Credit, the company's cash holdings increased from $20.8 billion to $24.1 billion in the last 4 quarters. Similarly, the company's debt increased from $12.7 billion to $14.2 billion. The company's net cash excluding debt increased from $8.1 billion to $9.9 billion in the same period.

Overall, the company's results were not as bad as feared. The troubles in Europe were already baked-in the share price of the company a long time ago. After all, Ford is not the only car company posting operating loss in the continent and the company can easily make up for the loss by posting strong profits elsewhere. It looks like the company will continue to post strong results in North America as long as it doesn't see any supply issues or production disruptions.

The analysts expect Ford to earn $1.26 this year, $1.44 next year and $1.77 in the year after. Since Ford beat last quarter's earnings estimates by a margin of 30%, I am sure that a number of analysts will raise their estimates for the next few quarters. I expect the company to beat the analyst estimates slightly an achieve $1.30-1.35 for the full year, which would indicate that Ford's fair value is between $13 and $15 depending on whether one wants to exclude the company's cash holdings in the estimates or not. Many times, when people look at Ford's balance sheet, they include Ford Credit's debt in calculations, which is mostly debt of people who purchase Ford cars through Ford Credit. Assuming that all that debt belongs to Ford is like assuming that none of the people who took credit to purchase a car will actually pay off their debt. As I mentioned before, Ford credit is actually profitable, which means that a great majority of the people are able to pay their debt off on time. If a significant number of people were delinquent on their debt, Ford Credit would post loss. This is why I don't like including Ford Credit's debt in calculations of Ford's fair value.

Once the European operations return to profitability in a few years, the company's share price can easily jump above $20 per share.

Disclosure: I am long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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