Many of you invest right alongside me and my
$100,000 Real-Money Portfolio
. And since your money is at stake here, along with the $100,000 in
real money that StreetAuthority has given me to invest, I'm
constantly monitoring my holdings.
As some of you may have noticed, there's been some real buzz about
one of my core holdings...
After a solid recent move in its stock,
needed to deliver a strong quarter to maintain its momentum. The
just-released fourth-quarter results are a bit shy of the consensus
view, and the stock is being hit by profit-taking on Friday.
Read my original take on Ford here
Said another way, Ford's stock had risen 19% thus far in January,
and is now up just 13%. Although the fourth-quarter holds a few
potential red flags, the stock pullback is likely just a pause
before the upward move resumes. That pause could last a few more
months -- at least -- but investors need to focus on the long-term
view and not the short-term trade. I still see this stock some 50%
above current levels within 12-18 months.
A tale of two markets
As expected, Ford's North American results were quite solid. (A
specific look at the numbers can be found in the widespread media
coverage this stock attracts.) Also, as expected, Ford lost money
in Europe. Yet European results were even weaker than I and others
assumed. Simply put, European sales were weak in the first three
quarters of 2011, but even worse at the end of the year.
Events in Europe will play out in one of two ways.
Sales could only temporarily stall out as consumers await the
resolution of the current debt crisis. This implies at least a
stabilization of sales at current levels and perhaps a modest
rebound later in 2012. Ford is prepping for that scenario by
sharply cutting costs in Europe right now, and management
anticipates much smaller quarterly losses in Europe later this
year. (Ford lost $190 million in Europe in the fourth quarter.)
In another scenario, the European debt crisis spirals out of
control and consumer confidence absolutely plummets. I don't expect
such a scenario, but if it plays out that way,shares of Ford would
likely drop from the current $12 to around $10.
The unfortunate part of the sobering European outlook is that Ford
continues to deliver great results in North America. Costs for raw
materials such as steel and rubber have pressured margins a bit,
but for all of the items that are under management's control, Ford
keeps delivering. Pricing remains quite firm as Ford avoids
profit-sapping rebates, and the company's R&D efforts are set
to deliver another set of compelling new designs this year. Were it
not for the drag associated with Europe, this stock would already
be in the mid-teens.
The key, as noted above, is to reduce the drag from Europe, which
would have the effect of creating higherearnings per share (
) later in 2012 and into 2013. Indeed, it was the prospect of
surgingEPS that had this stock in favor in 2010, and it's the
concern of pressures on
that pushed this stock back in 2011.
There are two takeaways from this quarterlyearnings
announcement . First, European concerns will likely persist until a
resolution has been reached. In fact, investors will likely await
the nextquarterly report to see if European sales have stabilized
at these lower levels and Ford's regional costs cuts are taking
hold and reducing losses.
Second, it's increasingly clear that Ford's North American
operations haven't been this strong in decades. Sure, Ford sold
more vehicles back in the middle of the last decade, but Ford's
profits per vehicle have never been this good. It's also important
to remember that steadily rising employment underpins expectations
that North America sales will keep rising in 2012, 2013 and 2014.
Action to Take -->
I'm sitting tight with my current stake in Ford, and I suggest
investors do the same. This is a bumpy ride, which you must
tolerate if you choose to own out-of-favor stocks like Ford. If
this business was fully healthy -- across every region -- then you
wouldn't have a chance to own such a solid company at such a cheap
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F in one or more if its "real money" portfolios.