Why I'm Holding My Stake in Ford


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  that Ford Motor (NYSE: F ) represents a compelling long-term investment, traders have seen it as a lousy short-term trade, pushing the stock even lower in recent quarters.

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.

The near-termcatalyst
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 earnings estimates.

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 my $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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Basics , Investing Ideas

Referenced Stocks: F

David Sterman

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