It was a wild week or so for Ford (NYSE: F ) shareholders, who saw excited investors rush into the stock after management dangled the possibility of a dividend, only to see the stock price fall hard on Wednesday after an earnings report that -- at least at first glance -- didn't compare well with strong year-ago results.
Ford shares have since recovered some of that lost ground, as some investors seemed to reassess the company's quarter. Buyers may have been encouraged by estimates from Edmunds and TrueCar.com, released on Thursday, that suggested October could be the best month for U.S. auto sales since the Cash-for-Clunkers-fueled sales frenzy in August of 2009.
I think that reassessment is worthwhile, because as I review Ford's results, I continue to see a lot to like -- and a story that much of Wall Street still seems to be overlooking.
Solid results in challenging conditions
The selling on Wednesday, which came despite quarterly results that beat estimates, seemed driven by concerns about Ford's margins, following news of commodities-related losses that put a $350 million damper on Ford's results for the quarter. Those losses contributed to CFO Lewis Booth's prediction that the company would miss its previous full-year guidance for improvements to its margin, which he now expects to decline to 5.7% from last year's 6.1%.
A sustained decline in Ford's hard-won margins would be a bad thing going forward, of course, but as I explained on Wednesday, I think that this will be a momentary blip, and not an issue that should raise major concerns for shareholders. Generally speaking, rising commodities prices will be something to watch, as margins could be pressured by major short-term moves -- but over the longer term, as all of the company's competitors adjust to the same pressures, Ford shouldn't be at a relative disadvantage. It will, however, bear watching.
But I think Wall Street's focus on the margin guidance misses the real news, which is that the company's execution on its "One Ford" turnaround plan continues to be strong:
- Gains in North America continue to be Ford's "engine", as Booth and CEO Alan Mulally have described them, powering the company's investments in product and new production facilities around the world. Ford is selling more vehicles here -- 11% more through September, ahead of the overall market's growth -- and is getting more money for them, 20% more on average than five years ago. The higher transaction prices are due in part to the competitive strength of Ford's new products, and in part to a strategic decision by Ford to offer luxury-car-type options on mass-market vehicles, enticing buyers to add high-margin options packages to their new Focuses and Explorers.
- Overseas results were mostly solid, with gains in China and strong results in Russia impressing. The one weak spot is continued pressure in Europe, where Ford posted a small loss. Ford is actually selling more vehicles (and gaining market share) in Europe versus last year, but deteriorating economic conditions have led competitors to make heavy use of incentives. That in turn has affected Ford's margins as the company has felt the need to respond with discounts of its own. Production volumes also suffered from Europe's version of those third-quarter plant shutdowns, which tend to be longer in Europe than elsewhere, Mulally said in a call for analysts and media on Wednesday. But Ford still expects its European division to post a profit for the full year, executives said, reiterating previous guidance.
- Strong demand for Ford's high-profit trucks and SUVs in the third quarter was a big contributor to results. It's important to note that Ford is in a very different situation from a few years ago, when it, like rival General Motors (NYSE: GM ) , was dependent on truck and SUV sales and suffered greatly when those fell. Now, with competitive, profitable products up and down the range, Ford is able to shift production on a month-to-month basis to provide whatever consumers are demanding at any given time. During the earnings call, Booth did allow that selling more high-margin trucks and SUVs wasn't at all a bad thing from a profit perspective, but it's no longer necessary. That distinction is important.
- Production problems are past. Ford has largely overcome its struggles to get production of its new Focus up to speed, and the company expects "much better availability" of the Focus in the current quarter. It also expects to have ample supplies of its white-hot Explorer SUV and pickups, and Ford's North American chief, Mark Fields, said on Wednesday that those models should continue to be "big drivers" of profits in the current quarter.
- Debt continues to fall. While Ford's "automotive cash" -- its term for cash on hand that isn't related to its financing arm -- fell a bit from $22 billion to $20.8 billion during the quarter, its once-towering mountain of debt continued to shrink as well, falling to a post-crisis low of $12.7 billion. Ford noted that the spread between those two numbers has improved by $10.7 billion over the last year, and its total "automotive liquidity" (automotive cash plus credit available to its car-and-truck-making business) stood at $31 billion as of the end of the quarter.
And what about that hint of a dividend? Despite prodding from analysts during Wednesday's earnings call, Booth was reluctant to add much substance to the remarks he made last week. But he did reiterate that "we're on record as saying we'd like to be paying a dividend sooner rather than later," and noted that initial payments would likely be smallish, as the company (sensibly) wants to ensure that its restored dividend is a sustainable one. My translation: A dividend is coming, but the company isn't willing to commit to a date yet. We'll see how things look come January.
A good outlook, despite economic concerns
As I noted, in what should be just a bump in the road, Ford lowered its full-year guidance for its margin for 2011. But broader guidance remains on track: Mulally expects continued improvement in pre-tax profits and "automotive" operating cash flow, and he reiterated that the company is on track with past guidance around its near-term and mid-decade outlook.
In contrast to his more pessimistic counterpart at GM, Mulally expects "moderate" global growth to continue, despite obvious challenges in Europe, and sees the falling rate of growth in China as a good thing, on balance, as it means a more sustainable growth level with less inflation risk.
Mulally also emphasized what should be the key takeaway for long-term Ford shareholders: The company is continuing to execute well on its plan, and its plan is an ambitious one. Having finally created a lineup of products that can compete with -- and, in some cases, completely outclass -- those of rivals Toyota (NYSE: TM ) and Honda (NYSE: HMC ) , the company continues to invest aggressively in new products to maintain its competitive position. Ford is also investing heavily in production facilities in emerging markets, which should drive new growth in coming years as Ford brings those competitive products to new, rapidly growing markets.
The remaking of Ford's vehicles into a polished, global set of class-leading products -- the real fruit of the huge 2006 borrowing spree that led to that mountain of debt -- is nearly complete, with new versions of the Escape SUV and Fusion sedan (which will replace both the U.S. Fusion and the Mondeo sold elsewhere) due soon. All of Ford's planned product-development efforts remain on track, Mulally said.
As Mulally noted in closing on Wednesday, Ford is just now beginning to realize the benefits of its "One Ford" plan. My sense is that as those benefits lead to further improvements in coming quarters, Wall Street will begin to realize them as well.
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