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Will Ford Outperform in 2013?

Will Ford's (NYSE: F  ) stock outperform the market in 2013?

It's a tricky question to try to answer. On the one hand, the Blue Oval's stock ended the year on a high note, rising about 12% in December. And there's a good chance that its recent momentum will continue for awhile, as U.S. auto sales continue to look strong.

On the other hand, while Ford as a company is healthier than it has been in ages, there are still some big challenges ahead – and those could weigh on the stock in months to come.

Could Ford's biggest strength become a vulnerability?
While Ford's earnings last quarter were generally fairly strong, they did raise a couple of points for concern looking forward. First, the company is exceptionally dependent on its North American sales at the moment.

Ford's net income last quarter was $1.63 billion, but the company earned $2.3 billion in North America before taxes. It's fair to say that North America, and specifically the U.S. market, is carrying the company at the moment. It might even be fair to say that a single product line is carrying the company: Many analysts believe (with good reason) that much of that fat profit was driven by U.S. sales of Ford's flagship F-series pickup line.

That's not a bad thing, but it could be a vulnerable spot in 2013. The F-series is a good, popular, well-reviewed product – but it's also one that is coming to the end of its life cycle. An all-new F-series is due next year, and as General Motors (NYSE: GM  ) has discovered recently, selling a pickup that's about to be replaced can be a challenge without heavy discounts. As good as it is, an F-series that is on its way out might not show as well as Ford would like next to fresh pickups from GM and Chrysler in 2013.

If F-series sales decline – or if Ford boosts incentives to try to hold sales ground – that could hit Ford's currently fat North American margins hard. On the other hand, Ford has so far done a good job of keeping its flagship product looking fresh through its current life cycle. Can it continue to hold its ground without big incentives for another year? This will bear close watching.

Will Europe start to improve – or will it get worse?
As recent earnings statements have made clear, Ford's biggest challenge (or at least, its biggest money pit) at the moment is in Europe. Ford Europe has been losing big money for several quarters, including $468 million in the third quarter of 2012, and will likely continue to lose money for a while.

Ford is hardly the only automaker struggling in the region, of course. A protracted economic downturn drove the region's overall auto sales to a near-two-decade low in 2012. That in turn has given all automakers a grim choice: Discount heavily to keep sales going, or risk losing ground in a declining market.

To its credit, Ford has taken a long-term view and so far refused to join the deep-discounting war being waged by Volkswagen (NASDAQOTH: VLKAY  ) , Fiat (NASDAQOTH: FIATY  ) , and others. But that has been an expensive choice, as the Blue Oval's market share in the region likely fell about one-half of one percent last year.

In October, Ford CEO Alan Mulally announced a comprehensive plan to fix the company's European operation. It's a good plan, one that includes plant closings, a slew of new products, and a significant shift in marketing strategy.

But Ford itself said that it was unlikely to lead to profits in the region until "mid-decade." Meanwhile, the company currently expects its Europe losses in 2013 to be comparable to those of 2012. From a shareholder's perspective, that's already priced into the stock. But if things take a turn for the worse in the region, or if Ford's turnaround plan doesn't work as expected, the company's losses could increase – and that would hurt the stock price. Again, shareholders should watch this closely.

The upshot: Despite challenges, Ford's still a good bet
These aren't the only challenges Ford faces at the moment, of course, and none of this is to say that Ford is doing badly. On the contrary: Sales have been steady, margins in North America have been terrific, Ford's business in China is growing fast, management continues to make good decisions, and the company is for the most part on very solid ground financially.

I continue to own Ford stock, and I continue to think that it's a good bet to appreciate over the next few years. But the company is facing a number of key challenges as 2013 opens, and shareholders should keep an eye on developments as the year unfolds.

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But despite some recent gains, Ford's stock still seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

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