Despite many of my recent articles here at The Motley Fool supporting a long bias on shares of Ford (F +1.65%), there are certain aspects investors should look at with more skepticism. I like to take the other side of my positions and opinions, in order to determine if there is a legitimate bearish case to be made against the stock.
Ford is no different. It's a stock that I hold long and one that I have bullishly written about for quite some time. So without further ado, let's examine Ford from the other side of the ticker tape.
A look around the world
While the company does have explosive sales growth in China, it means very little to the bottom-line, since the automaker is spending so much money on building out its infrastructure in the country.
Unlike General Motors (GM +0.59%) or Volkswagen, which cemented their roots in China two decades ago, Ford is late to the game and trying play catch-up. While this is great news for the long-term investor of five to 10 or more years, it doesn't play into the bull case over the next 12 months.
Europe used to be a black hole for Ford. Back in late-October, CFO Bob Shanks, said that Ford is "more firmly on track to a profit, not break-even, but profit by 2015."
This notion was confirmed on the company's first-quarter conference call, although it still lost $194 million in Europe during that period. This is much better than the $425 million it lost in the first quarter of 2013, so this is encouraging news.
But South America isn't so encouraging. Ford took an approximate $400 million charge in the first quarter due to currency losses, on its way to a $530 million loss overall in the region. We'll see how this situation continues to play out through the year and hopefully we'll see currency stabilization and an improved economy.
While China lacks significant contributions to the bottom line, European improvements are being weighed down by South American shortcomings. It's not the end of the world, but it's something for investors to keep in mind.
First quarter black eyes
Perhaps first quarter results -- where net profit dropped 39% to $989 million, versus $1.61 billion in the first quarter of 2013 -- are an indicator that estimates are going to be too high this year, especially if Ford comes in on the lower end of its guidance.
On the conference call, management said they still expect to earn a pre-tax profit of $7 billion-$8 billion this year, consistent to what they told investors at the annual shareholders meeting in December. This was negative news at first, because investors were looking for pre-tax profits to be in the camp of $9 billion-$10 billion.
Ford's recall of 692,000 vehicles will likely be covered by the recent deposit of $400 million into its warranty reserves in the first quarter. This obviously weighs on earnings, as will any other recalls in the future, (which there are hopefully none of significant magnitude).
The company has also planned to launch 23 new vehicles in 2014 around the world. This plan has not change, and is not cheap. That was actually the main reason Ford guided 2014 pre-tax profits below Street consensus.
Valuation and share buyback
Everyone seems to love Ford's valuation, and it's hard not to! At just 10 times last year's earnings and 8.33 times 2015 earnings estimates, shares of Ford are cheap. Much cheaper than the S&P 500's trailing P/E ratio of 18 times earnings and 16 times next year's earnings.
But just because the stock is cheap, valuation-wise, doesn't mean it can't get cheaper. If the economy takes a downturn, or the automaker has continuous negative news pop up (such as recalls, currency losses and downtowns in foreign markets), then earnings per share will fall and so will the valuation. It's that simple.
Turning to the share buyback, I highlighted it in greater detail, here. But in a nut shell, it's being done to counter the dilutive effects of management compensation and convertible debt. The announcement of a buyback can be misleading to bulls, and this is an example of that. This buyback will have little to no affect on earnings per share.
Final thoughts
My goal is not to come across as a hypocrite. After all, I am long shares of Ford and would not be if I were bearish the name. But I do want to point out that there is downside risk to buying shares of Ford at current levels.
If earnings fall due to unfavorable events, the share price is likely to decline as well. However, I still think the reward of being long near current levels outweighs the risk. I would certainly be a buyer in the $14 range if shares were to decline to that point.
