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Ford Says Things Are Looking Up

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It's understandable if investors in Ford (NYSE: F  ) might approach next week's fourth-quarter earnings report with some trepidation. After all, the company uncharacteristically missed big a year ago, reporting earnings of just $0.05 a share after higher commodities costs and troubles in Europe ate into profits.

Commodities costs and troubles in Europe have been troublesome themes for Ford since then, but fortunately for shareholders, the company's bottom-line results for the quarter should be a bit different this time around.

High expectations for a traditionally challenging quarter
Ford recently reiterated its guidance for the quarter, saying that it anticipates profits of $0.26 a share. That's a sizeable number for what is traditionally Ford's (and other automakers' -- General Motors (NYSE: GM  ) had a subdued report last year as well) weakest quarter. The last quarter of the calendar year typically challenges automakers for a couple of reasons:

  • Incentives tend to be high as dealers clear out the previous model year's inventory with "year-end sales events" and the like. Incentives, those "cash back" and "zero percent financing" deals one sees advertised on TV, are typically funded by the automaker and can eat deeply into margins.
  • Costs tend to be high as automakers roll out new models. The costs of launching a new model include substantial marketing expenses, of course, but also include things like factory downtime as tooling is changed over to produce the new-generation vehicles. Last year, Ford's launches of the all-new Focus and Explorer (and a major refresh of its F-series pickups) cost it big. This time around, the company is launching new versions of the Escape SUV and the Fusion sedan. Both of them are major entries that will incur expenses -- but in the case of the Fusion, some of those expenses may appear in the current quarter rather than in the fourth quarter of 2011.

It won't be a surprise if Ford CFO Lewis Booth tells us next week that that those kinds of factors weighed somewhat on fourth-quarter results. While $0.26 a share would represent a strong year-over-year improvement, it's considerably less than the $0.41 Ford earned last quarter.

With Ford's sales results strong through year-end, I expect to be hearing some good news from Booth and CEO Alan Mulally during next week's call. But that doesn't mean there won't be trouble spots.

Points of concern as we head toward earnings
Here are a few of the things I'll be listening carefully for as Ford's leadership sums up the quarter.

  • Incentives spending. Ford has done an admirable job of reducing its spending on incentives in recent years, but an incentives war may be under way as Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) seek to regain lost market share after a year of production disruptions. This may be more of a problem going forward than it was in the fourth quarter, but it's worth watching closely.
  • Asia. Ford's recent guidance indicated that its Asia-Pacific region -- dominated by China and India -- was expected to post a full-year loss. There could be good reasons for that (a stepped-up effort to expand production by building new factories in the region) or bad reasons (pressures on margins), or both. It'll be worth listening carefully to the details here.
  • Europe. Ford's European operation, like GM's, has come under pressure as economic fundamentals have deteriorated in the region. While Ford's unlikely to consider the kind of massive overhaul GM is expected to undertake with its Opel branch, I'll be listening closely as it explains the steps it is taking to improve results in the region.
  • Margins generally. Last quarter, Booth warned that Ford's full-year margin might come in below 6% thanks in part to losses on derivatives Ford was using to hedge against rising commodities prices. That news hit the stock hard despite strong results on other fronts. Higher margins have long been expected to be a key fruit of the company's "One Ford" turnaround plan, and with most of the pieces of that plan now in place, Ford's results for 2011 on that front -- and, importantly, guidance going forward -- could have a big impact on the near-term outlook for the stock.

All that said, Ford's recent guidance should give shareholders cause for optimism. Despite economic conditions around the world that continue to be challenging, the Blue Oval is clearly shifting into high gear as the last pieces of its impressive, globalized product line head into production.

And last but not least, I'll be listening for details of Ford's upcoming dividend payment, its first since September 2006. That dividend should arrive in March -- but you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts have identified "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers, but only for a limited time, so get instant access now.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. 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 (5) | Recommend This Article (8)

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 17, 2012, at 7:17 PM, spawn44 wrote:

    What you analysts are talking about now is quite different than just a short time ago. It was high debt, can they compete. Union contracts, high commodities. yada yada yada. Ford cruised through that analyst nightmare with flying colors Now it's maintaining margins. Japanese revenge, Europe collasping, yada, yada, yada again. This stock has to be the most over analyzed stock of all time. One scenario you overlooked. It's possible they could fire mulally hire the three stooges and put them on the main assembly line. It's something to think about anyway.

  • Report this Comment On January 17, 2012, at 8:33 PM, TMFMarlowe wrote:

    @spawn44: If you aren't interested in the challenges facing Ford from a business perspective, then why are you reading articles like this? If you are interested, then what exactly is your point?

    And yes, what I write about now with respect to Ford is different from what I was writing about when I started covering the company three years ago, because things have changed. That's how it goes.

    John Rosevear

  • Report this Comment On January 18, 2012, at 2:14 PM, DJDynamicNC wrote:

    Looking forward to the results of that call next week. I just loaded up on Ford when it was around the 11$ mark and I am confident in that decision, but it's definitely made me extra-interested in keeping track of the company.

  • Report this Comment On January 19, 2012, at 3:25 PM, JonsZx2SR wrote:

    "...because things have changed." Good point. Unlike GM or the federal gov't the change at Ford has been very real. Alan Mullaly having the full support of Bill Ford and the board of directors minimized fighting within the company. It will be interesting to see who Ford chooses as their next CEO, but I suspect it will not be done the way things happened years ago.

  • Report this Comment On January 19, 2012, at 7:03 PM, spawn44 wrote:

    Things have changed. That's exactly what my point is. Things have changed big time at Ford and the analysts are still nitpicking whatifs that matter little in the big picture. That may be one of the reasons this stock is so undervalued.

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