Why Ford Is Still a Buy

The news wasn't easy to miss, but in case you did, two interesting things happened to Ford (NYSE: F  ) on Tuesday.

First, the Blue Oval reported its fourth-quarter earnings, and they were good. Ford earned $0.31 a share, well ahead of the $0.26 Wall Street estimate.

Good stuff, right? Maybe not, because here's what happened next: The stock fell almost 5%, as investors reacted to a pessimistic shift in Ford's near-term outlook for Europe.

So is Ford still a buy?

I think so. Here's why.

Why Ford's plans should have big credibility
Ponder this background: A few years ago – in early 2009, to be exact – Ford was essentially left for dead by investors in the midst of the economic crisis. There were good reasons for that, starting with the fact that it was pretty clear that both of its hometown rivals, General Motors (NYSE: GM  ) and Chrysler, were headed for some heavy court-assisted restructuring, or worse.

Now, to casual observers at least, Ford looked to be in similarly rough shape at the time. Its debt load was titanic. U.S. auto sales at that moment were at lows not seen in decades. Ford's stock was widely viewed as essentially an option on the idea that the company might somehow survive – and a risky one at that.

But some investors, including quite a few Fools, saw something else. Ford had a plan, a good one, and just enough cash in the bank to pull it off. In fact, the plan was already under way – had been since 2006 -- and the company's newest models gave good reasons to believe it was working.

That plan is called "One Ford," and we know now how the story turned out here in Ford's home region of North America. Ford's quality and competitiveness went way up, its costs went way down, that debt load got paid down years ahead of schedule, and – most importantly – Ford has posted quarter after quarter of solid profits.

Ford's cars and trucks are now seen as class leaders. Ford's debt is investment-grade. And – and this is big – Ford's operating margins in North America are among the best in the business, because its costs are low and because its products are now good enough to sell on their own merits, without fat discounts.

So now investors are worried because the company has problems in Europe?

Well, guess what Ford's turnaround plan for Europe looks like.

The plan for Europe: exporting "One Ford"
To Americans, Ford looks like a pretty polished product. But the truth is, the company's overhaul isn't done. Its European operation has been losing big money, thanks to rough economic forces that have driven car sales to lows not seen in many years – and thanks to a business structure that is ripe for the same kind of overhaul that transformed Ford's U.S. operation.

Ford's factories in the U.S. now run at, on average, over 100% of what Ford considers to be "full capacity," which is two full shifts. That means some are working around the clock – a big profit generator. The industry rule of thumb is that a car factory breaks even at about 80% of capacity.

Ford's European factories have been running at more like 60% of capacity. See the opportunity? Ford does: It's closing three factories, and it has signaled that it will close more if necessary. That will lower costs, making each of Ford's sales more profitable – even if the overall market stays stagnant.

There's more. In recent years, Ford's product lineup in Europe has been a small one, composed mostly of locally designed offerings that were somewhat expensive to produce. But now, Ford has a powerhouse global vehicle lineup to tap – and it's able to add a bunch of new vehicles to its European lineup quickly, and at low cost. That right there should increase Ford's sales and market share -- even if the overall market stays stagnant.

Put simply, Ford is taking the lessons of its U.S. turnaround and applying them to fix Europe, where it has said it expects to return to break-even by mid-decade. And we as investors should give that approach a high probability of success, because it has already worked once.

Why Ford is still a buy
I haven't even touched on Ford's ambitious plan for Asia , where the company is making huge investments to be a big player by mid-decade. There are already signs that its push will be successful – but right now, the region is just breaking even, because of those huge investments.

So here's why Ford's a buy: That Asia push, and Ford's plan to fix Europe, mean that there's considerable upside from here – upside that will appear over the next few years.

Ford made $8 billion before taxes in 2012. If Europe had simply broken even, that number would have been almost $10 billion.

Now think about a profit in Europe. And add another couple billion from Asia.

That's where Ford is planning to be in two or three years. I don't know about you, but I plan to be along for that ride.

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. The stock has recently moved up, and it appears investors have started to notice what Ford is doing right. 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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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 30, 2013, at 11:25 AM, TMFTwoCoins wrote:

    Well said!

  • Report this Comment On January 30, 2013, at 11:43 AM, StevenCT wrote:

    Funny thing about traders, they are traders. In some cases even stupid. All those people that sold yesterday missed out on the div. declaired on shares of record today. Not just that but they left a stock that has so much potential. Ford is doing terrifically and will get through the Europe thing (no different then every other car manuf.). Don't know about everyone but I bought this morning (I guess, thanks for that).

  • Report this Comment On January 30, 2013, at 1:38 PM, bstaurrey wrote:

    Very good analysis of Ford that shows some of Ford's short term losses are due to opportunity and investment costs. As stated if they can accomplish even half of what they did in North America this company will be a huge cash and profit machine. I don't know why it is being sold off so heavily but eventually the fundamentals will rule.

  • Report this Comment On January 30, 2013, at 5:54 PM, Grahdodd wrote:

    Excellent analysis. Ford should do well.

    Their problem is long term reliability..they rate very well in first 6 years of ownership, but every year after that the Imports--Honda and Toyota--surge past them. After 10 years its no ball game.

    I think Fs product mix is middling, Chevy makes better trucks, the imports are redoubling efforts to solidify the small car segment where F has made inroads, and Lincoln is still throwing mud up against the wall to see what sticks...as it has been for many years.

    The Edge was one of the most ill-conceived who-knows-what-it-really-is in recent automotive history.

    And, anecdotally, I can attest that after 30 years they still can't make a reliable Transmission.

    Ford will be OK, but Wall Street is telling you something here..

  • Report this Comment On January 30, 2013, at 5:59 PM, rjk37 wrote:

    Things may not be as rosy as you think. Ford's cars are underpowered because of a mistake they made in engine selection and the quality of their cars is no longer "Job 1."

  • Report this Comment On January 30, 2013, at 6:25 PM, Perry88 wrote:

    Been watching Ford for years. During the economic downturn I noticed the stock was down to $1.16 so I grabbed some up. At the same time I noticed Sirius was down to 16 cents so I grabbed some of that also. Broke $3 about 2 weeks ago.

  • Report this Comment On January 30, 2013, at 6:29 PM, nofoolingforme wrote:

    Before you criticize the Ford quality, explain why Toyoya is calling back a million more cars. More serious safety issues. These major recalls have been hitting them quite regularly for the past couple of years, yet people still think they are number one. It is the typical stupidity of the masses. Be a follower and buy a Toyota rather than think for yourself and check out the North Amercan brands which have raised their quality to a par with the imports. The average person believes that Japanese is better simply because someone keeps telling them that. Things have changed! Time for people to think for themselves- not likely.

  • Report this Comment On January 30, 2013, at 7:24 PM, Pdest wrote:

    I bought a significant amount of Ford stock a few days before the quarterly report which also happen to be the Ex-Div date. With such a low P/E ratio, the fundamentals are very sound. Based on the article above, Motley should be recommending Ford as a Buy Now.

  • Report this Comment On January 30, 2013, at 7:27 PM, Grahdodd wrote:

    No fooling, the long term reliability ratings still favor Honda and Toyota. But the reliability ratings on the 1st 5 to 7 years of ownership, you're right---domestics have caught up. I agree these imports are bland, yet they are still enormously popular.

    My concern competetively for the Domestics is...what happens if Honda and Toyota actually make good looking cars? Toyota is already number one in the US with cars designed for my mom.

    Just saw preview of the 2014 Corolla..it wasn't ugly. I was

    surprised.

    I agree the US Auto Industry has enjoyed a wonderful renaissance. But global competition is incredible. And the Koreans have been growing faster than anyone.

    The ultimate winners will be consumers. They win big time in every segment.

  • Report this Comment On January 30, 2013, at 10:59 PM, donaldo36 wrote:

    I have been in the used car business for 38 years come June this year and had the least amount of repairs and warranty expenses with Ford vehicles. I am relating this from my sales of thousands of vehicles over this period and do not have shares of stock in any of the foreign or domestic vehicles mentioned.

  • Report this Comment On January 31, 2013, at 11:54 AM, rjk37 wrote:

    @nofoolingforme:

    I do not have to explain anything about Toyota because I never mentioned them!

  • Report this Comment On January 31, 2013, at 8:13 PM, trl101 wrote:

    One Ford = Alan Mullaly... Hopefully the succession planning will bring the same leadership excellence that he has brought Ford as the architect of Ford's turn around.

  • Report this Comment On February 01, 2013, at 2:28 PM, JudoFields wrote:

    I don't know. I have a few positions of F and just looked at the company HISTORICAL treatment of its long term investor.

    From 1984 to 1996, before it reverse split, dividend yield are a whopping 10%, that is a 60% return. BUT, the reverse split price stayed the same, reduced cap market by HALF, or if anyone have to sell it at that time have reduced their profit by 30%. Ford been doing this at least 3 times now. That is two decades of tradition until they got a non legacy CEO. Alan just stopped paying dividend instead of split. ( A little bit under average to most DJ's dividend stock)

    In my opinion, it just like saying to the other investors that he wanted you to be faithful to F, to your grave, consist of continual sacrifices to the employees or his family or buy a whole lot more when it split. The Ford have the persistent and the money to buy back the ownership.

    I could have read Google and Ford's data inaccurately. Feel free to point it out, really. Thanks fools!

  • Report this Comment On February 01, 2013, at 2:33 PM, JudoFields wrote:

    It's because I only cared for myself, like Mr. Ford and the Michigan people. That is why I drove a Prius, and owned a few Ford stock.

    I'm also not labor union member and doesn't have high pay. That is why I speak the truth.

    But the automotive industry of the USA is not shine bright, not shine bright. Meaning there could be better stuffs out there. Yep much better things on Wall Street...like the take over of Dell, for instance.

  • Report this Comment On February 01, 2013, at 3:14 PM, JudoFields wrote:

    Btw, ever since it debut on Wall Street, anyone know how much an average investor have made on Ford? an investor that have invested in Ford for 30 years? 20 years? 10 years?

    (assumed they purchased their share after one reverse split)

  • Report this Comment On February 01, 2013, at 8:13 PM, jmkdiva wrote:

    Very good analysis. The one thing you forgot to examine in your analysis of why Ford Europe is not doing well is the decisions of the President of Ford Europe, Stephen Odell. Prior to his tenure, Europe was Ford's biggest profit center. Since he took over as group vice president, chairman & CEO, sales have plummeted. One of the Foolish tenets: look at who's in charge. One of the wrong-headed US corporate ideas is to move long-time executives from one division to another even when they don't perform well, because it costs too much to fire them. I think losing billions in profits is worth getting rid of a poorly performing executive. I have no confidence Odell can lead Ford's retooling in Europe, but I know Jim Farley and Alan Mulally can. They are capable and visionary executives.

  • Report this Comment On February 01, 2013, at 10:24 PM, allans123 wrote:

    Indeed, a good analysis. I do have faith in Alan Mullaly and most of his staff's competence. I live in one of the most anti-American car regions in the US (Silicon Valley), and I see a growing number of Ford cars on the road, mostly the smaller ones like the Focus; I know it's only anecdotal evidence but compared to even just three years ago, I saw very few American cars.

  • Report this Comment On February 02, 2013, at 6:13 AM, TheBankManager wrote:

    Have you looked at the Ford line-up in the US of late?

    Yes, this 'One Ford' approach is very clear for the way forward. Whilst the European arm may not be as streamlined as their US counterparts - and this is evident from the Ford management approach noted - their vehicle line-up looks suspiciously European lead.

    Gone are the days of the massive four-wheeled land yachts they used to produce and instead we see Fiesta, Focus, Fusion (read Mondeo), C-Max, whilst the Escape id the Kuga.

    What the Yanks have learned, is that their 'old school' cars were no match for the quality, style and fuel economy that Europe had to offer, but they've now come around to this and are turning the business around.

    Additionally, the reliability of these cars has improved many-fold over the past 10-20 years, even at this level and can match some more expensive marques too. Just check out the Which? annual car survey for independent proof.

    Forget any suggestions by Ford US that they drove (pardon the pun!) this, as Europe have been designing building and selling these model sizes and line-ups for decades and our trans-Atlantic cousins have just caught on....

    All Ford (Europe) need to do now, is sort out their manufacturing economies of scale, but consider the major upside...whilst they're still taking the next 12-24 months to get that house in order, we - the consumer - can get a great bargain, since they NEED to shift metal!

  • Report this Comment On February 02, 2013, at 6:38 AM, TMFMarlowe wrote:

    @TheBankManager: Ford (US) drove it in the sense that Alan Mulally came to Dearborn and kept asking, among other sensible questions, "Why aren't we selling those cars everywhere?" (I know this because he has told me so, in so many words. Trust me that it's much funnier -- and at the same time, not funny at all -- when he tells the story. A little common sense went a LONG way in Ford's board room back in 2006.)

    It is indeed true that the newest Fiesta, Focus, Fusion/Mondeo, C-MAX, and Escape/Kuga all have their engineering roots in Ford of Europe.

    But don't undersell Ford (US), which has done excellent vehicles recently as well, with the current Explorer (and the all-important F-Series) being shining examples. (From a UK or European vantage point you may not realize it, but the F-Series is the single most important product to Ford's global bottom line.) It isn't JUST Europe.

    Thanks for reading.

    John Rosevear

  • Report this Comment On February 02, 2013, at 10:40 AM, philmckraken wrote:

    I am a Ford stock and car owner too. I am mostly bullish on the company but am concerned their debt has actually increased from last year. Also closing those European plants is no easy task with the labor unions in Europe.

  • Report this Comment On February 02, 2013, at 3:06 PM, rokkyu wrote:

    Consumer Reports has become negative about Ford (US I think) quality over the last few years. Anecdotal: I have had a number of Fords going back to a 62 Fairlane in college (bad tranny) - more of an emotional brand attachment for some odd reason, as it has been a mixed record recently:

    Big Negative - $2600 for son's 05 Mustang tranny last year with only 55K miles - not harshly driven - and another $500 for driveshaft just because it was type without replaceable $25 u-joints! Positive - 04 Focus wagon bought from "little old lady's" estate super low mileage, almost 60K now. Dunno if I will buy more Fords (or stock) due to CR's assessments, and that 'stang experience. Need "one more" vehicle to retire with, and it needs to be a keeper.

  • Report this Comment On February 02, 2013, at 3:21 PM, RockyTopBob wrote:

    Several things have to work out for Ford.

    1. Making something out of the Lincoln brand. If Lincoln can be half as successful in China as Buick is for GM that will be a big plus

    2. Success of the large frame car replacement. Ford's replacement for the bestselling police vehicles and the Town Car crowd are not very successful so far

    3. Continued buyouts of legacy employee overhead in the pension programs

    4. Starting a PR program for CEO replacement before Alan leaves. We don't want an Apple, Jobs vs. Cook controversy

    5. Restraining new union demands now that profits could support them since the profit sharing program only goes so far

    6. Not resting on the past success of the F150 considering the Ram's inroads into Ford's market share

    Regards,

    Bob

    long Ford for many years

  • Report this Comment On February 02, 2013, at 9:09 PM, dsciola wrote:

    IMO, the key question here is are they building cars that will sell in Europe and Asia. Sure Ford One may be working in the US, but what are the tastes/preferences of drivers elsewhere?

    My guess is Ford has to make even smaller more fuel efficient cars at the very least to be successful in both markets since both markets I believe have smaller roads than in US. Then also make cars that appeal to Euro/Asian consumers style-wise.

    Of course I dont know a ton about Euro/Asian driving preferences...would love feedback from others

    Dom

  • Report this Comment On February 02, 2013, at 10:38 PM, SkepikI wrote:

    A very fine synopsis of risks, progress, and prospects, except for one thing, missed completely. GM has a serious shareholders overhang of 300 MILLION shares owned by the US Treasury- ie US. These shares are planned to be sold in the next 12-18 months, and depending on WHO you believe, US must get $50-70/sh to come out even. This is a very large poke in the eye to US Taxpayers, who are likely the biggest "buying group" of car customers in the country. Its possible GM could hide this. Its possible consumers could ignore this. BUT if Ford has superior products and the facts are generally known... well what would YOU do?

    Long F, former Chrysler guy, owner of a 99 subaru (Indiana made) outback with 388,000 mi. Likely needing replacement in 2-4 years. No GM or Chrysler for me.

  • Report this Comment On February 03, 2013, at 6:44 AM, TMFMarlowe wrote:

    @Skepikl: I didn't miss it, I just don't think there's much left to be gained for Ford on that front. GM has already lost some U.S. market share since its taxpayer-funded reboot. As its products improve -- an ongoing effort that will continue to unfold over the next couple of years -- it'll win some of it back. The rest will go (has already gone, most likely) to Toyota and Honda and Hyundai and VW as well as Ford.

    Put more simply, I think the damage has already been done on that front, and I don't see it as a big growth opportunity for Ford going forward. The big gains are to be found outside of the U.S.

    Thanks for reading.

    John Rosevear

  • Report this Comment On February 04, 2013, at 3:57 PM, tombarrett150 wrote:

    I must be missing something. Why is it better to buy from a US company that uses more imported parts and manufactures in Mexico than it is to buy from a Japanese company that uses mosty US parts and builds the cars in the US?

  • Report this Comment On February 05, 2013, at 9:14 AM, HarryPiels wrote:

    Well, maybe, but a leading consumer magazine has noticed a disturbing turn for the worse in the quality (repair rate ) of several Ford vehicles. Many astute buyers consult those publications and buy according to their ratings..

  • Report this Comment On February 05, 2013, at 11:38 AM, LadySpeed wrote:

    Ford is definitely still a buy. Thumbs up! They need to be louder about their marketing, because they have some impressive products in their lineup. Their build quality and their engines are remarkable.

    I test drove the new turbo Focus ST before it was available for sale. I drove the car in an autocross, after it had been operating continuously for an entire day with different people driving it/stalling it/slamming on its brakes. And it still felt crisp and fresh and solid!

    "Consumer magazines" are replete with biased reporting, regardless of how unbiased they consider their editorial policies to be. Vehicles are only as good as their initial quality, maintenance schedules, and their drivers' habits.

    My '06 Mustang, which I bought new, has been the most reliable vehicle I have ever owned. I've racked up the miles on it, have modified it extensively (including reprogramming the engine computer). It is pleasantly simple to maintain.

    IMO, Lincoln needs an overhaul of its marketing. They have great products, and it's unbelievable that they do not market them more. I could sit in the passenger seat of a Lincoln MKX all day--and I recommend trying it out--the leather is buttery soft, the ergonomic cushioning is amazing, the cabin is quiet... But someone will still buy a Volvo XC60 that feels like a previous-gen Hyundai inside...what gives?!!!!!!!!!!

    Lincoln could really benefit from having a small, stick shift entry-luxe vehicle to gather the interest of prospective manual-transmission-seeking A4 or 3-series prospectors.There is no reason not to... After all, little 'ole Volvo took the fantasy of the Polestar concept and made it real. And even Buick has marketed its soft Turbo Regal. I talked to a Lincoln press guy at an auto show about this a few years ago, and he chuckled. Bottom line is, marketing is magic.

  • Report this Comment On February 06, 2013, at 4:33 PM, LovesUScars wrote:

    I love Ford vehicles. In fact, I love Ford so much, it rubbed off on my son. He recently purchased a 2012 Explorer and earlier a 2008 Ford F-150 pick-up truck.

    Why? Quality .... quality ..... quality.

    He was convinced long time ago when as a child he rode my 1989 F-150 4x4 pick-up truck that it was all about quality, It has a good soft ride and a powerful engine with overdrive. Do you know what? I still own the truck and it has been driven close to 200,000 miles on the same engine.

    What surprised me: My 1989 F-150 pick-up truck is good (I called it the "Cadillac" of pick-up trucks when I first got it), but his 2008 F-150 pick-up is even better, if that is possible.

    Ford should put back the marketing mantra: "Quality goes in before the name goes on" back into its advertising and live up to the marketing hype by building top quality cars. It;s the little things that count that result in satisfied car owners.

    BTW, I also own a 12 year old 2000 Ford Ranger 4x4 pick-up. It is built like a tin can like foreign cars. Someone said it is built by Mazda. For no reason, the paint on the hood is peeling off, the plastic arm rest broke off, and the temperature gauge does not work. This has been my on-going experience with the Ford Ranger. The mantra, FORD (Fix Or Repair Daily) applies to this vehicle. Good riddance!

    Ford has a choice. Which direction will it go in manufacturing vehicles? Go and build with inferior products or choose quality materials to build vehicles. Again, remember, it's the little things that count in making good cars.

    The choice is so simple, if Ford wants to restore its former stature as a manufacturer of quality vehicles. Just a little twitch here and a twitch there will result in quality vehicles.

  • Report this Comment On February 07, 2013, at 5:56 PM, garylrose wrote:

    After reading the report on Ford, I am convinced that I have made the correct decision in buying Ford stock. My first purchase was around $7.00 per share. I am buying more today even though the stock has almost doubled in price. I see a sustainable upside for Ford.

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