It certainly wasn't the story that most Ford (NYSE: F) watchers were expecting on Friday: The company announced fourth-quarter net income of $190 million, or $0.05 a share, down big from $1.7 billion-with-a-b last quarter and $886 million in the fourth quarter of 2009. Ford's operating profit of $1.3 billion, or $0.30 a share, fell well short of the $0.48 cents analysts expected.

Wall Street hates an earnings miss, and Ford's stock closed down more than 13% on Friday. That's obviously an overreaction, but the question it raises is an obvious one: Is this a fluke, or is it a sign of trouble at the Blue Oval?

Good news and bad news
So what happened? Although sales remained strong, a number of things weighed on earnings, including one or two that Ford CFO Lewis Booth thought the analysts might have missed:

  • A big debt-reduction charge. Ford took a one-time charge of $960 million as part of a conversion of debt to equity. This was announced earlier and expected.
  • Product launches. Launching a new vehicle, especially a major one, is expensive, and Ford had two and a half big launches in the U.S. last quarter -- the new Focus and Explorer, and a major refresh of the F-series trucks that included a new lineup of engines. Did analysts fail to factor these in, as Booth suggested? They'll have more chances -- Ford is expected to launch several more new products this year.
  • Higher commodity prices. Put simply, Ford's ability to raise product prices couldn't keep pace with the quick rise in commodity prices that we've seen recently, and that squeezed per-vehicle profit. Not good, but not a huge surprise.
  • Europe stunk. Ford's European operation lost $51 million, hit by lower overall industry sales volumes, a shrinking market share, and those rising commodity costs. Ford has made big gains in the U.S. and a number of Asian markets, but like rival General Motors (NYSE: GM) it has yet to translate that success to Europe, which remains somewhat surprising and a concern.

How much should shareholders worry? That depends on your context. Ford has clearly become a stable, profitable business that is as well managed as any of its rivals, but its profits are susceptible to factors such as commodity prices, and some opportunities for turnaround remain in its overseas operations.

So is the glow fading?
Ford's PR folks were quick to point out (correctly) that taken as a whole, 2010 was a roaring success. The company's full-year net income of $6.6 billion was its highest in more than a decade, and the year saw Ford's debt fall by $14.5 billion, a 43% decrease. That reduction was enough to cut the company's annual interest costs by more than a billion dollars -- enough to fund an additional major new vehicle program, every year.

Speaking of debt, this past quarter saw the company hit a long-anticipated milestone: Ford's cash on hand now exceeds its debt by $1.4 billion. That's huge, and it's another big step toward the company's long-term goal of a return to investment-grade status.

But those in management did look to temper expectations for 2011. They expect all of the company's business units (including Europe) to be profitable, but at a "lower level" than in 2010. Between the public goodwill stemming from Ford's ability to avoid a government bailout, recall woes at Toyota (NYSE: TM), and weaker product lineups at rivals such as Honda (NYSE: HMC), the Blue Oval had an opportunity to make big gains in 2010, and the company took full advantage.

That combination of factors is unlikely to repeat itself any time soon. Toyota is finding its footing, competitors such as Hyundai are coming on strong, and although much of General Motors' own new-product onslaught is still several quarters away, the newly public GM remains a strong competitor in the U.S. and key markets around the world.

But Ford's still rolling
For all that, a little context is in order. I had to laugh at this line from a Bloomberg article previewing Ford's earnings on Thursday:

"The annual profit would be the second straight for Chief Executive Officer Alan Mulally, who has improved quality and expanded the model lineup."

As if that were actually the only recent storyline for Ford.

First, it's only half right -- Ford's total number of global models has actually shrunk considerably since Mulally's arrival, and it'll shrink more in the next few years. It is true that Ford's quality has improved considerably on Mulally's watch, along with other trivial things such as the balance sheet, the stock price, customers' perceptions, and the company's chances of, y'know, actually surviving.

On one hand, yes, market-share gains and big profits are going to be harder for Ford to win in coming quarters, as costs rise and rivals continue to get back on their feet. Shareholders expecting the stock price's upward trajectory to continue are likely to be disappointed.

On the other hand, even with Friday's surprises, Ford is still a solidly profitable and much-admired company with strong prospects around the world. Speaking as a Ford shareholder, with the company's situation solid and still improving, I don't plan on selling my shares just yet.

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