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Will Ford's Good Times Continue?

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Are Ford (NYSE: F  ) shareholders in for a happy week?

The Dearborn, Mich., auto giant is scheduled to report first-quarter earnings tomorrow, and analysts are predicting strong results -- strong enough, some reports are suggesting, to stand as the company's best quarter since the late 1990s.

There's no question that Ford has been on a historic upswing since the dark days of 2008, and the Blue Oval even outsold ancient nemesis General Motors (NYSE: GM  ) in the U.S. last month. But is it reasonable to expect a blowout quarter for any automaker in the face of rising gas prices and increasing economic uncertainty?

As a Ford shareholder, I'm certainly hoping for great news tomorrow morning. The company's stock price has been stuck in an unimpressive rut recently, thanks to a less-than-shiny fourth quarter and those queasy-making gas prices. But while surging fuel costs and general consumer angst may end up putting a damper on car sales in general, there are a few reasons to believe that Ford is well-positioned to post a glowing set of results.

The right product at the right time
Product is the key to everything in the auto business, and Ford enjoys particular strength here at the moment. Several of the automaker's key models are brand new or recently refreshed, and the company has timed its emphasis on fuel economy in every product line especially well. Strong new entries like the small Focus and Fiesta and the surprisingly fuel-efficient new Explorer have been gaining sales and market share as gas prices climb.

Japan's woes create an opportunity
While nearly all of the global automakers have felt the Japan disaster's effects on the automotive supply chain, it's no secret that giants Honda (NYSE: HMC  ) and Toyota (NYSE: TM  ) have been especially hard-hit, with one recent estimate suggesting that Toyota's production may be cut in half for months. Key fuel-efficient models from both automakers are in short supply, a situation that may continue for months. Some models, like Honda's Fit -- a direct Fiesta competitor -- have become increasingly hard to find at dealers, a situation that may be leading longtime import buyers to give the American brands a look. Ford's polished product line could capture an outsize share of these kinds of buyers. And the Japan disaster is unlikely to have a significant impact on Ford itself, CEO Alan Mulally recently told reporters.

Pricing power is rising
What happens when you have the cars people want, and your competitors don't? You can ask more money for them. Ford's per-sale profits are almost certainly up -- Edmunds estimates that Ford's average selling price was up 3.9% in the first quarter over the year-ago period. Shortages of Japanese cars and Ford's improving reputation for quality suggest that that trend could continue for a while.

Recent pressures have abated
Ford shares got clobbered after the company missed estimates last quarter, thanks to analysts' underestimation of the costs of new-product launches and the pressures of rising commodity prices. But those product launches are now fading in the rearview mirror as the products in question gain traction in the marketplace. Commodity prices remain high, but that's not an unknown at this point -- and those costs should be more than offset by Ford's improved pricing power.

Long story short, the pieces are indeed in place for a strong quarter. What could go wrong?

One small problem
Here's one point that the company will certainly discuss tomorrow: market share. Ford's board of directors set a goal of 14.1% of the U.S. retail auto market, which excludes fleet sales, by the end of the first quarter. According to federal filings, the company's actual share for the quarter was 13.6% -- a significant miss.

I think that's both good and bad news. The bad should be obvious, but here's the good: Mulally and other Ford executives have talked at length about the need to avoid resorting to big incentives to boost sales and market share totals. GM boosted incentives spending in February, but Ford stuck to its guns and held spending to a lower level. Did that result in a loss of share for the quarter? Probably. But while the devil will be in the details, I don't think it's a major worry.

And more to the point, for all the reasons outlined above, I think Ford's market share numbers are going to be looking awfully good before too long. Will the company's profits follow suit? We'll learn more tomorrow.

Want to read more about Ford? Use My Watchlist to keep up with all of the Fool's analysis of the House of the Blue Oval -- and all of your other favorite stocks.

Fool contributor John Rosevear owns shares of Ford and General Motors. General Motors is a Motley Fool Inside Value selection. Ford is a Motley Fool Stock Advisor pick. The Fool owns shares of Ford. You can try any (or all!) of our Foolish newsletter services free for 30 days. We Fools may not 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 (2) | Recommend This Article (7)

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 April 25, 2011, at 2:14 PM, baldheadeddork wrote:

    Solid piece, John.

    I hate estimates on Ford because the company doesn't make forecasts or give guidance. That leaves analysts to their own orifices, err, crystal balls, and that can end badly. When Ford only came in with 30 cents per share for Q4 instead of the 48 cent street estimate, it said a lot more about the failure of the analysts to see what was happening at Ford and in the industry. That 48 cent estimate was straight out of Fantasyland. But F owners were the ones who paid for the mistakes.

    All that said, I think the street estimate of 50 cents for tomorrow is on the low side. Ford pulled fifty cents a share in Q1-10. Even though they missed market share targets, their first quarter sales are up 16% over last year and their best performing models are also the most profitable. F-series sales are up 23% over 2010, and Ford has seen >20% YTD increases for the Fusion, Escape and Edge. The new Explorer isn't up to full production yet, but it's still averaged 10K units a month for the first quarter and the profit margins on that are huge.

    With lower debt costs compared to a year ago and a 4% rise in average transaction price, I won't be shocked to see sixty cents a share tomorrow. I think 0.55 is likely. If they miss 0.50 I'll be stunned.

    But even if they do crush the street estimates, it doesn't mean the market will reward Ford shareholders. This is how the market responded last year when Ford beat Q1 estimates last year:

    "But investors worried that the company can't maintain its strong gains in the second half of the year. Ford's first-quarter U.S. market share made its biggest jump in 33 years, for example, and is unlikely to keep growing at that pace. Ford also faces higher prices for steel and other raw materials, rising interest rates and expected weaker European demand.

    Ford shares fell 89 cents, or more than 6 percent, to close at $13.57."

    Sound familar?

    I'm going to be watching tomorrow for an update on the debt restructuring. In Feburary, CFO Lewis Booth announced Ford would retire $3b in debt in the first quarter. He's consistently outperformed guidance in this area, so I'm expecting a bigger number to be announced tomorrow. I also want to see a roadmap of debt retirement for the rest of 2011.

    I think Ford's breakout quarter is going to be the one we're in now. Explorer and Focus production will be up to full speed before June, and Ford has the best position in the industry to capitalize on rising fuel prices and shortages of Japanese cars. The third quarter should be huge, too.

  • Report this Comment On April 25, 2011, at 6:08 PM, Greckrock wrote:

    Ford has figured it out. Build a quality car and they will come.

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