Solid Earnings, But Is Ford Still Healthy?

Includes: F, HMC, NSANY, TM
by: Cabot

By Elyse Andrews

The car industry was one of the hardest hit in recent years. The recession was particularly cruel to automakers, which were already bogged down by union disputes, decreasing sales of U.S.-made vehicles and climbing oil prices.

But lately, things have started to turn around.

Just this week, Toyota (NYSE:TM) announced that its worldwide production in March surged 97%, following an 83% boost in February.

This may be somewhat surprising as Toyota was not only hit by the Great Recession, but the company created its own problems after issuing several recalls. (I own a car that was part of the accelerator pedal recall and just this week, I received a notice about another floor mat recall. Will it ever end?)

In journalism school, one of my professors used to say, “All you have is your reputation.” Meaning that you better make sure the story you’re publishing is accurate because once you break the public’s trust, it’s awfully hard to gain it back.

Toyota will be reeling from these recalls for years, but it seems that the public is already starting to flock back to the automaker. Many of Toyota’s vehicles are still highly rated and its offering of hybrid vehicles is surely helping as consumers make choices away from gasoline and toward Green.

But Toyota isn’t the only company bouncing back with such vigor. Honda Motor (NYSE:HMC) also reported an increase in global output in March, up 26% from a year ago. Nissan Motor’s (OTCPK:NSANY) March production grew 85%.

Ford Motor (NYSE:F), which did not take a U.S. government bailout and has perhaps been the most solid U.S. carmaker in recent years, had some news this week when it released first quarter fiscal results.

The company earned $2.1 billion in the first quarter and said it expects to be solidly profitable this year (see earnings call transcript here). Ford reported a net income per share of 50 cents, its highest quarterly profit in six years. Revenues rose 15% to $28.1 billion.

And the company is making money around the world, from its North American market to Asia, South America and Europe. Ford saw an 84% surge in sales in China, while its U.S. sales jumped 37%. The company made $1.2 billion in North America, which had been hemorrhaging money in recent years.

Ford has been featured in both the Cabot Top Ten Report (where subscribers currently have more than a 40% gain) and the Cabot Market Letter, both edited by Michael Cintolo.

This is what Mike wrote about Ford when he recommended it in March in Cabot Market Letter:

Ford Motor is a powerful turnaround story, as sales of its cars and trucks are ramping up in a big way-U.S. sales rose a whopping 43% in February from the prior year, including a big 28% jump in retail sales. It’s gaining market share from GM and, recently, from Toyota, whose troubles are well documented. And earnings are already beginning to go through the roof; the firm has been solidly profitable the past two quarters and could earn more than $1 per share in 2010. While we can’t say F is in the first inning of its advance, we’re impressed with the stock’s long 18-week base during the second half of last year, its powerful advance into January, and then its tight seven-week zone during the market’s correction. F has recently broken above resistance at 12, resuming its major advance.”

But the market’s weakness and Ford’s solid, but less-than-blockbuster earnings report seem to have put the brakes on the stock for now.

Mike recently wrote about earnings season perceptions and reactions (an absolute classic).

One part is particularly relevant to the Ford news, so I’ll reprint it here:

It’s earnings season, and that means every day there are stocks gapping up or down following their quarterly reports and conference calls. Most days, at least one of our recommendations in one of our various newsletters is gapping up or down from the opening bell.

In almost every case, the company we’re following will have met or exceeded the official analysts’ estimates for sales and earnings. And the forecast is usually pretty good, too. Yet despite this “good” news, the stock can often tumble a few percent, and in a few cases, fall much more, breaking through key support.

Whenever this occurs, I am usually inundated with emails asking “Why is the stock down when the numbers were so good!” My usual answer is simply, “Expectations were higher than what the company delivered.” But I should probably also say, “It doesn’t really matter WHY the stock is down; the fact that it’s down is all you need to know.”

Said another way, it’s not the news, it’s the REACTION to the news that counts. That goes for earnings reports, but also to any headline news in the stock market. News is only “good” if it results in upward price movement.

So while Ford’s earnings report was solid, it may not have been enough to keep the stock in its upward advance. Mike put the stock on hold this week and he’s watching the 13 area closely for signs of support.