Ford - U.S. Strength Underscores Potential For Further Upside

| About: Ford Motor (F)

Ford Motor Company (F) announced its third quarter results on Tuesday. Equity markets are closed for a second day in a row, as a result of hurricane Sandy. Investors will get the opportunity to react to the results on Wednesday.

Third Quarter Results

Ford reported third quarter revenues of $32.1 billion, down 3.0% on the year. Revenues comfortably beat analysts consensus of $31.2 billion.

Ford reported pre-tax profits of $2.2 billion, up $200 million on the year before. The company reported an after tax profit of $1.63 billion, down 1.1% on the year. Earnings per share came in unchanged at $0.41 per share. Third quarter earnings included a $83 million special item.

Third quarter earnings of $0.41 per share came in ahead of analysts expectations of $0.35 per share.

Third quarter production rose by 24,000 units to 1.36 million units, based on strength in Asia-Pacific and Africa. Fourth quarter production is guided at 1.48 million units.

CEO Alan Mulally commented on the results, "The Ford team delivered a best-ever third quarter, driven by record results in North America and the continued strength of Ford Credit. While we are facing near-term challenges in Europe, we are fully committed to transforming our business in Europe by moving decisively to match production to demand, improve revenue through new products and a stronger brand, improve our cost efficiencies and take advantage of opportunities to profitably grow our business."

Segmental Information


Revenues for the automotive division fell from $31.1 billion to $30.2 billion. Pre-tax earnings rose 32.6% to $1.78 billion. Operating margins rose by 150 basis points to 6.3% on the back of strong performance in North America.

North America

Revenues in North America rose 8.3% to $19.5 billion. Production rose by 17,000 to 673,000 units. Pre-tax earnings rose to $2.33 billion. Operating margins rose by 340 basis points to 12.0% on higher pricing and lower contribution costs. Results were partially offset by higher structural costs, among others.

South America

Revenues in South America fell from $3.0 billion to $2.3 billion over the past quarter. Revenue declines were primarily the result of a weaker Brazilian Real and lower production volumes which fell to 104,000. Pre-tax earnings fell to a mere $9 million. Operating margins fell from 9.3% to just 0.4% on the back of the previously mentioned factors and higher costs.


Revenues in Europe fell over a quarter to $5.8 billion. Industry sales in the continent hit the lowest levels in two decades. Ford cut back its production by 32,000 to 319,000 units. As Ford believes that changes are structural, the company announced a transformation plan to target 6-8% operating margins. Pre-tax losses came in at $468 million, for negative operating margins of 8.0%.

Asia-Pacific and Africa

Revenues for the Asia-Pacific and Asian region rose to $2.6 billion, as the company set new market share records in China. Production volumes rose by 54,000 to 264,000 units. Pre-tax earnings came in at $45 million, for an operating margin of 1.7%. This compares to last year's negative margins of 1.8%.

Financial Services

Financial services revenues came in at $1.9 billion. Pre-tax earnings fell to $393 million.


Ford ended its third quarter with $24.1 billion in cash, equivalents and marketable securities. Automotive debt stood at $14.2 billion at the end of the quarter, for a net cash position of $9.9 billion. This excludes the debt position of the financial services division.

For the first nine months of 2012, Ford generated revenues of $97.8 billion. Net income came in at $4.1 billion, or $1.02 per diluted share. Annual revenues could come in around $130 billion, the company could earn around $5.5 billion for the year.

Currently, the market values Ford at $39.5 billion based on Friday's closing price. Excluding the net cash position, this values the firm at $29.6 billion. This values the operating assets at 0.3 times annual revenues and 5-6 times annual earnings.

Currently, Ford pays a quarterly dividend of $0.05 per share, for an annual dividend yield of 1.9%.

Investment Thesis

Year to date, shares of Ford have fallen some 4%. Shares advanced from levels of $11 in January to highs of $13 during spring. Shares fell back to lows of $9 in July. Worries about lower economic growth and mounting losses in Europe put pressure on shares. Shares recovered to $10.36 per share.

Over the past five years, shares of Ford have risen some 20%. Shares traded below $2 by the end of 2008 on worries about an imminent bankruptcy of the US auto industry. On the back of strong leadership of Alan Mulally, shares rose to $18 in the beginning of 2011. From that point in time, shares have given up roughly half of their value.

Between 2008 and 2012, revenues fell from $143.6 billion in 2008 to an estimated $130 billion this year. The company took $14.8 billion in losses in 2008, but has been profitable ever since.

Ford's performance of its different operations is rapidly diverging. US quarterly profits and operating margins hit the highest level since 2000. Ford's operating margins of 12.0% during the quarter, were very strong. Strength in Ford's core business was offset by weakness in Latin America and continuing problems in Europe.

Ford is again going to restructure its business in Europe. The company targets 6-8% operating margins by 2015, compared to losses of 8% at the moment. If Ford successfully manages to restructure the business, operating profits could rise by some $2 billion per annum in 2015. Ford has announced the closure of three facilities, which involves job losses totaling 6,200. In total, some 18% of European production capacity will be cut, and 13% of Ford's employees will lose their jobs.

Ford is currently very profitable, and is on track to earn some $5.5 billion for the year. Europe will show improvements in the medium term, but this will most likely be offset by moderation in US activities which perform exceptionally good at the moment. Yet, shares are very appealing, trading at low earnings multiples. I think shares do offer long term value. Investors should look for triggers, including a significant dividend hike, which is a real possibility given the financial strength.

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