Throughout the past few years, I've been focusing on the
Ford Motor Co. (NYSE:
. Management's rejuvenation efforts will be talked about in
business schools for decades to come. Yet, asshares marched from
below $2 in early 2009 all the way up to $19 this past fall, my
attention started to drift away. With so many analysts now singing
the company's praises, this was no longer an underappreciated
story. I vowed to check back in if the stock ever came back down.
That time has come. After a 25% pullback in just two months, I
are once again quite appealing. Don't look for another 1,000% move
in the stock. But how about a 100% move?
An end to the good news
The Ford story was almost too good to be true. The company blew
past estimates for seven straight quarters, as sales continually
came in above plan while expense growth remained muted. That all
came to an end in the fourth quarter of 2010, as Ford missed the
consensusprofit view by nearly 40%. About half the shortfall came
from one-time costs associated with the launch of new products and
engines, but one fact became clear: the era of Ford's upside
surprises has ended -- for now.
Shares fell 13% on the day those weak results came out and they've
been falling ever since, as rising oil prices raise the notion that
highly-profitable truck sales will take a deep hit.
Counter-intuitively, that's precisely the kind of bad news you
should be looking for. That's because rising oil prices are a
reflection of short-term global tensions. Once those tensions cool,
oil prices are expected to march back below the $100 per barrel
mark. When that happens, investors will again focus on the broader
picture for the auto industry.
Ford's total debt dropped from $34 billion at the end of 2009 to
$19 billion at the end of 2010. Now, management is set to pump up
cash balances as debt levels have moved back into a more manageable
range. Citigroup analysts predict that Ford's considerablecash flow
will help boost the company's cash levels from a current $20
billion to $40 billion by the end of 2013. Yet, even as Ford has
become quite healthy, the auto industry is still in a funk. Total
industry sales remain well below historically typical levels, but
as they continue to rebound, look for Ford'sincome statement to
In the middle of the past decade, sales of cars and trucks were
typically about 17 million in North America. That figure fell below
11 million in 2009 before rebounding to about 12 million in 2010.
Analysts at Citigroup predict that figure will rise to 14.6 million
by 2012. Goldman Sachs thinks that figure will hit 15.5 million by
The key takeaway here is that making cars and trucks entail very
high fixed costs and the incremental
made on each car can really fatten thebottom line . Ford has so
aggressively cut costs that it has been able to be quite profitable
while industry sales are weak:
Earnings per share (
could come in around $1.75 to $2 this year, compared with $1.94 in
2010 (don't forget: Ford eked out $0.09 in 2009 and lost $3.13 in
2008). That level of profit comes as Ford's factories are expected
to be operating at 77% of capacity in 2011. Rising industry sales
could push that figure to 85% by 2013, according to Goldman Sachs.
That 8% percentage-point change will help boost profits at a far
By my math,EPS are likely to exceed $2.50 by 2013 and approach $3
by 2014. Few are talking about such profit levels right now,
especially as rising oil prices threaten to dampen truck and SUV
sales. Indeed that's the biggest risk for Ford's shares. Yet, as I
noted earlier, the recent spike in oil prices doesn't seem to be
the result of global shortages, and they are likely to cool off
after tensions in the Middle East and North Africa subside.
Action to Take -->
We're not out of the woods just yet in terms of this oil scare.
Some think that NATO intervention in Libya would cause prices to
spike yet higher (while others think such a move would dampen the
speculative frenzy in oil pits, as the endgame would be in sight).
Yet, as we've seen on Tuesday, March 8, some buyers aren't waiting
for the oil price pullback, and Ford's shares are up 2%. I'd
suggest buying in when shares hit $14.50 (up from a current $14.30)
to be sure the recent wave of selling has been flushed out. If
shares do indeed fall lower, below $14, keep your buy price $0.50
above whatever lows the stock hits on an intra-day basis.
In the next few years, shares could trade up to eight or nine times
target, or $24 to $27. That's almost a 100% potential gain from
current levels. The path ahead may not be as smooth as Ford's
steady upward ascent in 2009 and 2010, but this Detroit icon's
turnaround is still unfolding.
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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