When business school professors look back on this era, they'll
likely talk to their students about one of the greatest turnarounds
in the history of enterprise. Few companies have gone from
near-death to industry titan in such a short time as
Ford Motor (NYSE:
. And investors have showed their respect, with shares rising from
under $2 in early 2009 to $17 just 20 months later. That's an +850%
But signs are emerging that the party may be over for now. Shares
made a quick move from $12 since mid-September (a +40% jump in two
months), yet now appear to be hit by some profit-taking since last
Monday. There's no doubt that shares have plenty more upside: the
stock trades for just eight times projected 2010 profits, and the
auto industry is likely to see higher volume down the road. But the
coming year still holds real challenges for this auto maker.
Here are five key issues you'll need to track if you own shares of
Ford. If these items come to pass and shares slip back to the lower
teens, it would create a fresh compelling buying opportunity for
long-term investors. [Read my previous analysis, on
why Ford can double within three years.
1. A shaky consumer.
Virtually every analyst that follows the auto industry assumes that
industry sales will rise by about one million vehicles in 2012 to
13 million, and another million again in 2013. That forecast
assumes a steady rise in employment that leads consumers to upgrade
their rapidly-aging existing cars. But right now, it's simply
unclear whether we are on the cusp of new job creation. Indeed as I
in this piece
, public sector layoffs may be high enough to offset any employment
gains in the private sector.
2. Costs are starting to rise.
Analysts currently expect Ford's sales to rise +4% in 2011, but
profits are likely to be flat. That's because Ford's extended
streak of cost-cutting has come to an end, and some costs are
starting to rise. A ton of hot rolled steel coil that cost around
$400 on average in 2009 is now closer to $600 and it could hit $700
next year, according to UBS. In addition, Ford also secured
significant wage concessions when the
tanked, and labor contracts call for wage hikes in 2011 and 2012.
Ford is also expected to pay higher taxes in coming years.
3. Europe's slump could deepen.
Ford derives a quarter of its sales in Europe, and here again
analysts are modeling for a steady rebound in demand. But outside
of Germany and France, European economies remain at risk of falling
back into recession as belt-tightening moves to balance budgets
dampen economic activity. Ford lost $196 million in Europe in the
most recent quarter, and that region could continue to generate
losses in 2011, contrary to analysts' expectations of rising
European profits in 2011.
4. Benign interest rates may not stay in place.
Ford's credit division has greatly benefited from rock-bottom
interest rates. First, low rates -- in the 4% to 6% range -- have
made for great financing terms for customers. Second, Ford has
generated very impressive profit spreads on those rates, with its
own borrowing costs well lower than that 4% to 6% figure. If
interest rates start to rise, Ford will either have to boost its
own lending rates to customers (dampening demand), or take a big
profit hit at its highly lucrative Ford Motor Credit division by
keeping lending rates intact and making do with smaller spreads.
5. Competition andmarket share .
Ford, and the analysts that follow it, anticipate continued
gains on the heels of the new Fiesta model, the soon-to-be-updated
Focus and a refreshed Ford Explorer. Yet competitors are also
stepping up and could beat Ford at its own game by rolling out even
more fuel efficient vehicles. For example, Mazda is working on a
series of engines that are expected toyield 20% to 40% mileage
improvements in its next product cycle upgrade. Toyota, Honda and
Nissan are all expected to field new offerings with a range of
fuel-saving technologies in the next few years as well. Ford had
some very impressive technology tricks up its sleeve the last few
years (such as the line of EcoBoost engines), and they'll need to
do it again to keep pace. A number of analysts are now touting
ever-loftier target prices predicated on even more market share
gains for Ford -- and that's no sure thing.
Action to Take -->
I love Ford. It's a great American story. I loved Ford even more
when analysts were writing the company off and missing the obvious
signs of a
. Now that Ford is universally loved by analysts and investors,
it's helpful to look at the what-could-go-wring side of the
equation. In my gut, I know this stock will end up far higher down
the road. In the near-term, I am concerned that the company is
expected to maintain its track record of unbroken good news. And as
I said earlier, if these things happen and shares slip, it would
create an incredible buying opportunity for long-term
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
P.S. -- There's an analyst with a track record you need to
see. She has an 89% win rate -- remarkable for this market. And she
just keeps picking winners. One of her recent picks shot up +18.2%
in just 13 days. Go here for the details...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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