Why Ford Is Still a Buy

The news wasn't easy to miss, but in case you did, two interesting things happened to Ford (F 6.10%) 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 (GM 1.98%) 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.