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Ford (NYSE: F ) is set to report its fourth-quarter and 2011 annual earnings before the bell on Friday, and in terms of the company's fundamentals, analysts are by and large expecting a pretty good report.
With the consensus estimate (and, not coincidentally, Ford's own recent guidance) at $0.26 per share, according to a Bloomberg survey, expectations are optimistic -- but reasonably so.
That's important, as the fourth quarter is traditionally Ford's weakest. And while the Blue Oval's core business has been strong, there are some issues that could weigh on earnings.
But tomorrow's headlines may be dominated by news of an accounting windfall that could add $14 billion or more to the Blue Oval's 2011 bottom line.
The $14 billion bonanza that may spook investors
The accounting issue, which has to do with taxes, is a bit complicated. I explained it in more detail last year, but here's a nutshell summary: Back in 2006, when Ford was losing money like crazy and first laying the groundwork for its turnaround, its accountants created something called a "valuation allowance" on its books. That's a reserve that is held on a company's books when it doesn't think it will be able to use a tax loss in the near future -- usually because it thinks it's going to be losing money for a while longer.
According to a 10-K filed by Ford in 2011, that reserve was worth $15.7 billion as of the end of 2010. While an expert interviewed by Bloomberg thinks that it's worth a bit less now, around $14 billion, that's still a lot of money to have stuck in what in essentially accounting limbo. Ford is obliged under the rules to undo that allowance and declare it as a special item sooner or later, and some analysts expect that that will happen tomorrow.
If it does, Ford's 2011 earnings total will be huge -- more than $20 billion, its biggest total since it reaped a windfall after selling a lender in 1998. But that total will come with some concerns -- namely, that Ford will be obliged to pay a higher tax rate going forward.
Those concerns may weigh on shares -- indeed, they may have been weighing on Ford's share price for some time. But they're unfounded, say several analysts, because Ford has operating loss carry-forwards and other tax assets on its books that should spare it from paying taxes for several years.
If Ford actually unwinds its valuation allowance tomorrow, my hope is that CFO Lewis Booth explains the tax issue -- specifically, those tax assets, and Ford's (lack of) tax liability for the next several years -- convincingly, in a way that Wall Street is able to hear. If so, the stock could see a nice jump.
But there are other issues that matter more to the company's prospects, now and in the longer term, and tomorrow will bring updates on those as well.
What else to watch as the company reports
While Ford uncharacteristically missed big a year ago, posting a profit of just $0.05 a share, its operating profit (excluding a fat one-time charge) was $0.30 a share, a bit higher than is expected this time around. That reflects some challenges that are brewing for the Blue Oval in its operations around the world.
There's lots of good news likely aside from the tax windfall, though, starting at home. Ford's sales in North America have been solid -- the company posted an 11% year-over-year increase in 2011, and it gained market share for the third year in a row. That's the first time since 1970 that that's happened, and its due to Ford's strength, to the challenges faced by its key Japanese competitors, and to rival General Motors' (NYSE: GM ) relatively dated product line (though the General is making a major effort to catch up.)
And the company is well positioned going forward: Its hot new Fusion sedan has leapfrogged Toyota's (NYSE: TM ) class-leading Camry, and Ford's replacement for its popular Escape SUV is expected to be a more profitable entry that should build on its predecessor's success.
But some of the Blue Oval's operations outside the United States have hit potholes. Europe continues to be a trouble spot for everybody, as a weak economy has led to fierce incentives battles between manufacturers. And CFO Lewis Booth warned earlier this month that floods in Thailand, which hit rival Honda (NYSE: HMC ) hard but were initially thought to have only a minor impact on Ford, probably rendered the company's Asian operations unprofitable for the period.
Europe is critical to Ford's global business, not least because it's the company's center of small-car expertise -- and because the popularity of Ford's Fiesta and Focus in the region add greatly to both models' economies of scale (and thus profitability). And major restructuring probably isn't in the cards. Ford, and its shareholders, will simply have to ride out the European troubles, which could get worse before they get better.
The upshot: Look past the tax windfall to understand Ford's prospects
Booth's take on the company's near-term prospects in Europe will be worth listening to closely during management's conference call on Friday, as will his discussion of Ford's margins and management's outlook for North America in coming months.
I'll also be listening for an update on the company's debt load, much of which was incurred to finance its turnaround back in 2006. Continuing the (so far strong) efforts to unwind that debt will be helpful to Ford's goal of a return to investment-grade credit status.
Ultimately, here's the takeaway: As you read the reports and watch the stock on Friday, look past the valuation allowance issue to the nuts and bolts of Ford's operational results. That will give you the real story of Ford's quarter -- and a better idea of what to expect from the Blue Oval in 2012.
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.