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It certainly wasn't the story that most Ford (NYSE: F  ) watchers were expecting on Friday: The company announced fourth-quarter net income of $190 million, or $0.05 a share, down big from $1.7 billion-with-a-b last quarter and $886 million in the fourth quarter of 2009. Ford's operating profit of $1.3 billion, or $0.30 a share, fell well short of the $0.48 cents analysts expected.

Wall Street hates an earnings miss, and Ford's stock closed down more than 13% on Friday. That's obviously an overreaction, but the question it raises is an obvious one: Is this a fluke, or is it a sign of trouble at the Blue Oval?

Good news and bad news
So what happened? Although sales remained strong, a number of things weighed on earnings, including one or two that Ford CFO Lewis Booth thought the analysts might have missed:

  • A big debt-reduction charge. Ford took a one-time charge of $960 million as part of a conversion of debt to equity. This was announced earlier and expected.
  • Product launches. Launching a new vehicle, especially a major one, is expensive, and Ford had two and a half big launches in the U.S. last quarter -- the new Focus and Explorer, and a major refresh of the F-series trucks that included a new lineup of engines. Did analysts fail to factor these in, as Booth suggested? They'll have more chances -- Ford is expected to launch several more new products this year.
  • Higher commodity prices. Put simply, Ford's ability to raise product prices couldn't keep pace with the quick rise in commodity prices that we've seen recently, and that squeezed per-vehicle profit. Not good, but not a huge surprise.
  • Europe stunk. Ford's European operation lost $51 million, hit by lower overall industry sales volumes, a shrinking market share, and those rising commodity costs. Ford has made big gains in the U.S. and a number of Asian markets, but like rival General Motors (NYSE: GM  ) it has yet to translate that success to Europe, which remains somewhat surprising and a concern.

How much should shareholders worry? That depends on your context. Ford has clearly become a stable, profitable business that is as well managed as any of its rivals, but its profits are susceptible to factors such as commodity prices, and some opportunities for turnaround remain in its overseas operations.

So is the glow fading?
Ford's PR folks were quick to point out (correctly) that taken as a whole, 2010 was a roaring success. The company's full-year net income of $6.6 billion was its highest in more than a decade, and the year saw Ford's debt fall by $14.5 billion, a 43% decrease. That reduction was enough to cut the company's annual interest costs by more than a billion dollars -- enough to fund an additional major new vehicle program, every year.

Speaking of debt, this past quarter saw the company hit a long-anticipated milestone: Ford's cash on hand now exceeds its debt by $1.4 billion. That's huge, and it's another big step toward the company's long-term goal of a return to investment-grade status.

But those in management did look to temper expectations for 2011. They expect all of the company's business units (including Europe) to be profitable, but at a "lower level" than in 2010. Between the public goodwill stemming from Ford's ability to avoid a government bailout, recall woes at Toyota (NYSE: TM  ) , and weaker product lineups at rivals such as Honda (NYSE: HMC  ) , the Blue Oval had an opportunity to make big gains in 2010, and the company took full advantage.

That combination of factors is unlikely to repeat itself any time soon. Toyota is finding its footing, competitors such as Hyundai are coming on strong, and although much of General Motors' own new-product onslaught is still several quarters away, the newly public GM remains a strong competitor in the U.S. and key markets around the world.

But Ford's still rolling
For all that, a little context is in order. I had to laugh at this line from a Bloomberg article previewing Ford's earnings on Thursday:

"The annual profit would be the second straight for Chief Executive Officer Alan Mulally, who has improved quality and expanded the model lineup."

As if that were actually the only recent storyline for Ford.

First, it's only half right -- Ford's total number of global models has actually shrunk considerably since Mulally's arrival, and it'll shrink more in the next few years. It is true that Ford's quality has improved considerably on Mulally's watch, along with other trivial things such as the balance sheet, the stock price, customers' perceptions, and the company's chances of, y'know, actually surviving.

On one hand, yes, market-share gains and big profits are going to be harder for Ford to win in coming quarters, as costs rise and rivals continue to get back on their feet. Shareholders expecting the stock price's upward trajectory to continue are likely to be disappointed.

On the other hand, even with Friday's surprises, Ford is still a solidly profitable and much-admired company with strong prospects around the world. Speaking as a Ford shareholder, with the company's situation solid and still improving, I don't plan on selling my shares just yet.

Want to read more about Ford? Add it to My Watchlist, which will find all of our Foolish analysis on the company.

Fool contributor John Rosevear owns shares of Ford and General Motors. Ford is a Motley Fool Stock Advisor recommendation. General Motors is a Motley Fool Inside Value choice. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (14) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 29, 2011, at 11:53 AM, randallengle wrote:

    I took advantage of the drop to buy more shares of Ford and will buy more if it goes lower.

  • Report this Comment On January 29, 2011, at 12:15 PM, edselcortez wrote:

    Good time to buy Ford. I think it can still reach $25/share.

  • Report this Comment On January 29, 2011, at 1:00 PM, pwong319 wrote:

    Ford is a great stock. They are the only car company not needing government bailout. They are strong and their stock price will soon prove that. Buy now and you won't be sorry.

  • Report this Comment On January 29, 2011, at 1:56 PM, spawn44 wrote:

    If Ford keeps heading in the right direction their stock price could double in the not to distance future and their company valuation would still be far less than Toyota's. I believe that's exactly where their going.

  • Report this Comment On January 29, 2011, at 2:39 PM, zboxiii wrote:

    I took advantage of the dip and bought 60 shares. I'm holding out for the long term on this,

  • Report this Comment On January 29, 2011, at 4:53 PM, glenncduck wrote:

    It gauls me that analysts' guesses are considered sacrosant. They did a lousy job!!!! And should be fired. It's a sad state of affairs when an analyst's guess is so far off from actual results and it's the guess that trumps actual. The market would be better off without ego driven prognostications by analysts. It seems most all articles carry the words missed analysts expectations. SO STOP EXPECTING; IT'S USUALLY WRONG!!!!!!!

  • Report this Comment On January 29, 2011, at 9:45 PM, turkeybird wrote:

    Ford - onward and upward in 2011.

  • Report this Comment On January 29, 2011, at 9:53 PM, baldheadeddork wrote:

    I also think the analyst expectations were way out of line. Forty-eight cents is almost double the fourth quarter last year, and ten percent over the results of the third quarter. That should have raised a lot of eyebrows because the fourth quarter typically has lower car sales. And if they missed the cost of new model roll outs, that's totally on them.

    You had to be an idiot or a true believer to buy Ford in 2009, but I think its attracted a lot of speculative money in the last half of 2010. Even now it's up 50% in the last five months. Before the pullback on Friday it was up almost 30% just in the last three months, even though the monthly sales numbers reported in the fourth quarter showed a plateau in Ford's market share. Was the run up in Q4 as much an overreaction as the Friday sell off? Maybe it was.

  • Report this Comment On January 29, 2011, at 9:58 PM, baldheadeddork wrote:

    (BTW - I know this isn't the autos weekly column, but the real big story in the industry in the last two weeks is Dan Ackerson's management shakeup at GM. He's undoing all the good work that got GM's products to this point. I'd love to see John do some reporting on this.)

  • Report this Comment On January 30, 2011, at 2:52 PM, belseware wrote:

    The guaranteed overreaction. That's ok, though it'll take a couple months to recover the stock price.

    All is well, we will hold our own.

    One minor concern, not yet manifest: When things ease up and it's time to grow again, we get loose. May Alan PREVENT that from haunting us.

    Stockholder and retiree.

  • Report this Comment On January 30, 2011, at 11:34 PM, wigginsrl wrote:

    If we can keep the UAW bosses locked up during full moons and somehow get the members to appreciate actually HAVING JOBS and GETTING HONEST SALARIES rather than dreaming of piles of gold, Ford just might make it now.

  • Report this Comment On January 31, 2011, at 8:48 AM, TMFMarlowe wrote:

    @baldheadeddork: GM article should be up late Monday. Akerson's moves have definitely been... interesting.


  • Report this Comment On February 04, 2011, at 1:03 PM, j1c200 wrote:

    I sold about 5 shares of my priceline holdings that I bought at $100 and picked up an additional 250 shares of Ford for long....

  • Report this Comment On February 05, 2011, at 2:10 PM, HurricaneJohnson wrote:

    I am a Ford fan, but the new Explorer is now a smaller SUV priced similar to a BMW small SUV. I hope Ford dealers are going to offer deep discounts. This concerns me since the Explorer is a bell-weather brand for them.

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