I went out on a limb last week stating that I was confident Ford would beat estimates, by nearly a dime, at 35 cents a share. I was a little ambitious, as its net income was 40 cents per share, but its quarterly adjusted numbers came in at 31 cents a share, well above the consensus estimate of 26 cents. Finally, investors who had waited patiently for Ford's (NYSE: F ) stock to take off have been rewarded, as the stock has recently been on a tear. So why are the shares down this morning after beating estimates? I'll cover the details, show you what you need to know, and take a look at what Ford is saying about the first quarter of 2013.
By the numbers
Ford's fourth-quarter revenue, versus 2011, was up 1.9% to $36.5 billion, but full-year 2012 lagged behind 2011 total's by $2.0 billion. Ford's full-year, pre-tax profit was $8 billion; the company had the best fourth quarter in more than a decade, which it did with a beefy operating margin of 10.4%. Companywide fourth-quarter net income was $1.6 billion, which is $565 million higher than in 4Q 2011, excluding the boost given last year from deferred tax assets. The full-year net income was $5.7 billion, or $1.42 per share. Both of those numbers, while strong, were slightly lower than 2011 mainly due to Europe's losses being larger than previously estimated. Increased revenue in a strong North American market helped offset these losses to beat the Street's estimates.
Investors looking ahead
Let's take a look at two quick factors that are playing a role in the stock price decline this morning. The biggest concern, Europe, is uglier than anticipated. For the fourth quarter, Ford lost $732 million compared to losing $190 million in the prior year. For the full-year 2012, Ford lost $1.75 billion compared to previous estimates of $1.5 billion. Recently Morgan Stanley analyst Adam Jonas had predicted Ford would be able to break even before mid-decade. He made this prediction based on Ford's quick management actions to close plants and contain pension costs. Looking at the larger losses, and comments from the conference call this morning, we shouldn't expect Ford to break even in Europe until the mid-decade mark. Ford has announced plans to cut capacity 18%, and hopes to minimize losses by closing three plants. Following this hit, each quarter will be important, as losses in Europe are expected to worsen and top $2 billion this year.
Another factor to follow is Ford Credit projects. For the year, these accounted for $1.71 billion in pre-tax profits, which was down from $2.4 billion in 2011. This substantial drop has a simple explanation behind it: higher-yielding assets financed in previous years are running out and being replaced by much lower-interest financing. Investors should follow this and see if the low-interest financing has bottomed out, or if we'll continue to see weakness.
Enough of the bad news
There is plenty to be thrilled about. Ford recorded $1 billion in automotive operating-related cash flow, good for its 11th straight quarter of positive performance. This is no doubt one of the reasons Ford felt confident enough to double its quarterly dividend about two weeks ago. One bit of information I am happy to see is that Ford ended 2012 with automotive gross cash of $24.3 billion, exceeding debt by $10 billion and extending its liquidity position by $2.1 billion over the previous year. An improving North American auto market is only part of the reason for these positives. After the deep recession, automakers had a tough lesson to learn; it was imperative that Ford control costs and increase efficiency to be profitable if vehicle sales dropped by the millions. Alan Mulally's "One Ford" plan has done this extremely well by focusing on these four points:
- Aggressively restructuring to operate profitably at the current demand and changing model mix
- Accelerating the development of new products that customers want and value
- Financing the plan and improving the balance sheet
- Working together effectively as one team, leveraging Ford's global assets
Job well done, but don't take it from me. "The Ford team delivered strong results once again, underscoring that our One Ford plan is working," said Mulally. "We are well positioned for another strong year in 2013, as we continue our plan to serve customers in all markets around the world with a full family of vehicles – small, medium and large; cars, utilities and trucks – with the very best quality, fuel efficiency, safety, smart design and value."
In the fourth quarter, company production was up 1.5 million units, an increase of 125,000 from 2011, and beating recent guidance by 13,000. For the full year, it produced 5.7 million units, an increase of 54,000 from last year. What's more important, is that the company expects the first quarter of 2013 production to be up 160,000 units to 1.6 million, versus 2012. Comparing first quarter of 2013 to the fourth quarter 2012, production is up 72,000 units. Analysts expect the global market to increase yet again in 2013, and this should bode well for Ford. It expects a strong 2013 year with operating profit to be equal to 2012, operating margin to be about equal, and cash flow related to automotive operating to be higher.
Even with the stock price down today after the earnings report, there is plenty for investors to be excited about. Expect Mulally's "One Ford" plan to continue to improve efficiency and add to the bottom line. Expect a stronger North American market, demanding high-margin trucks, to keep bringing in the profits. There is reason for concern as the situation in Europe is dismal, but I think the negative reaction this morning is only temporary. Make no mistake, if management continues to make sound decisions, produce popular vehicles, and keep the hard lessons learned from the recession in mind, the future remains brighter for Ford than ever before.
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