Investors and traders are an entirely different breed. While
investors assess a stock's value in the context of long-termprofit
growth, traders solely focus on key near-term events. So while
I've been convinced
Ford Motor (NYSE:
represents a compelling long-term investment, traders have seen it
as a lousy short-term trade, pushing the stock even lower in recent
Simply put, Ford has been a "don't touch" stock for many while
its European division wrestles with weak demand and large operating
losses. Indeed, Ford's 2012 and 2013 earnings-per-share (EPS )
forecasts (which I'll discuss in a moment) are lower than they were
when I first recommendedshares in December 2011.
Yet looking at the stock in a shorter time frame reveals a
different picture. This stock is now on the upswing, as it recently
moved above the $10 mark for the first time since late June, and up
above its 100-daymoving average .
Why the rebound? Ford's European operations, though still
troubled, are getting fresh management attention and are likely to
show smaller operating losses in the quarters ahead. Back out the
money-losing European operations, and Ford's North American
operations will become the real focus for this stock.
Accelerate and cut
Ford's new plan for Europe is quite ambitious, and you should
assume it will likely be only partially successful, at least as
long as the region remains in such a funk economically. As the
fifth-largest automaker in Europe, Ford will aim to accelerate
itsmarket presence by filling its showrooms with more models. For
example, the Mustang and the Ford Edge will be exported from U.S.
factories. At a recent meeting in Amsterdam, Ford detailed a wide
range of new or updated vehicles for the European market, with
plans to roll out
15 new vehicles
in the next five years.
At the same time, Ford is looking at areas for cost cuts, most
likely in terms of manufacturing capacity and greater use of key
platforms for global vehicle launches. "Despite the economic
crisis, we are investing in the future. We want to make the
statement loud and clear that we believe there is a great
opportunity in Europe," said Steve Odell, Ford's head of European
operations. The company intends to takemarket share in the European
market, which itself is expected to rebound roughly 20% to the 23
million annual unit levels seen five or six years ago.
Taken in tandem, these moves should have a measurable impact on
Ford'sincome statement . To give a little context, Ford earned $2
billion in North America in the second quarter, and lost $400
million in Europe. The deepening drag in Europe helps explain why
Ford is expected to earn just $1.25 a share this year, down from
$1.51 a share in 2011.
Ford has taken proper steps to cut costs in North America, and
should benefit from the high cost of fewer new product launches in
2013. That's why analysts have expectedearnings per share in 2013
to rebound to 2011 levels of around $1.50. In the long-term, Ford
is likely to move well past breaking even in Europe and count on
the region as a key source of profits.
But analysts have yet to adjust their earning models to account for
the changes emanating from Europe. Earnings estimates have remained
unchanged for the past 30 days. Yet, in the weeks ahead, analysts
will re-visit their spreadsheets as they start to anticipate the
late October release of Q3 results. And as they do, look for those
2013 forecasts to trend higher. This stock's growth above $10
reflects such a move, but it's only the beginning. Look for Ford to
keep strengthening in the weeks ahead on the heels of rising
Risks to Consider:
U.S. auto and truck sales have held up quite well, even as
Europe has been troubled. If the U.S. market falters, then it will
be hard for this stock to move higher. That's why a long-term focus
is crucial for this very inexpensive stock.
Action to Take -->
How far can this stock go in a few years? Perhaps, it could reach
the mid-$20s. Though Ford's near-term earnings power is likely to
remain below $2 a share, there's no reason it can't earn $2.50, or
even $3 a share by mid-decade. In addition, Ford'sbalance sheet --
which already sports a net cash position -- should only get
stronger, so there's no reason that this stock's forwardmultiple
can't approach 10 as we get closer to mid-decade.
Despite the near-term tailwinds emanating from the European
operations, you shouldn't lose sight of the broader long-term view.
Ford is doing all the right things under a very impressive
management team, so every step taken in 2012 should lead to a far
stronger company in a few years when the globaleconomy is on the
mend. That helps explain why Ford is the single biggest position in
$100,000 Real-Money Portfolio
-- David Sterman
David Sterman owns shares of F.StreetAuthority LLC does not hold
positions in any securities mentioned in this article.
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