Ford Motor Company (NYSE:F) has a lot going for it, despite not having a surging stock price. The folks at the Blue Oval rolled out 16 new vehicles last year in North America, which was more than triple the amount it launched in 2013. Its sales continue to surge in the world's largest automotive market, China. Its new performance lineup was recently highlighted by the Ford GT, which stole the show during the 2015 North American International Auto Show in Detroit. Earlier this month, IHS Automotive announced that Ford took home top honors for Overall Loyalty to Manufacturer and Overall Loyalty to Make. Heck, if that wasn't enough, Ford even hiked its dividend 20% a few weeks ago.
Despite all of that, investors have been prepared for a decline in year-over-year profitability when Ford reports its fourth-quarter earnings on Thursday. Here are three things investors should look for, aside from the standard earnings-per-share data.
Typically, during the fourth quarter Ford will shed more light on the progress it has made with its massively underfunded pension plan. At the end of 2012, Ford's pension plan was underfunded by $18.7 billion, a huge obligation that required billions of Ford's capital in recent years. As Ford poured a total of $8.4 billion into the fund in 2012 and 2013, that obligation was brought down to under $10 billion.
Another factor that helps reduce the obligation of Ford's pension plan is the discount rate, which is linked to interest rates. As the discount rate slowly rises, and the expected rate of return on pension fund assets rises with it, Ford is required to have less capital in its fund, thus reducing its obligation.
Investors shouldn't expect a surprise surge in discount rates when Ford reports its 2014 data, however, or a huge decline in its overall pension obligation, because Ford has reduced the amount of capital it's pouring into the fund. However, if Ford's pension plan is underfunded by "only" $7.5 billion, it will be a solid step in the right direction. This is a big story because as Ford spends less and less on funding its pension plan and reducing automotive debt, much more cash will be returned to shareholders.
Market share in China
There's no question that China will play a pivotal role in Ford's success throughout the remainder of this decade -- and beyond. Many analysts predict that one of every three new-vehicle sales in the world will take place in China by the end of the decade. Ford obviously wants its fair share, and it has made steady progress from its goal in 2012, when management claimed it would double market share in China from 3% to 6% by the end of 2015. Here's how Ford's progress in China has played out:
From the third quarter of 2013 to the third quarter of 2014, Ford increased its market share in China by only 40 basis points, to 4.7%. Investors should hope for a 5% market share when Ford releases its fourth-quarter data, but it will almost certainly fall short of that mark. There's no doubt Ford will have to accelerate its market-share gains in the back half of 2015 to reach its goal in China, but investors should keep an eye on it nonetheless. Ford was late to the game in China but has made up ground quickly. If this progress fades away, expect shareholders to react unfavorably.
International black hole
Last, and arguably most important, investors will absolutely want to pay attention to Ford's losses in Europe and South America. It's likely that both of those regions will combine to erase roughly $2.2 billion from Ford's bottom line when the book is closed on 2014. Look what adding only Europe's portion of those losses would do to Ford's earnings in recent history:
More important, though, will be management's explanation and forecast. We already know that rather than breaking even in Europe this year, Ford will chalk up another roughly $250 million in losses. Has the deterioration in Russia caused that outlook to worsen? Is a recovery in South America going to stretch past 2016? If the answer to these important questions is a negative one, don't be surprised to see Ford's stock take a quick dip.
Don't get too worked up, though, Ford investors: As I mentioned above, there are a lot of good things going on for the folks at the Blue Oval, too. Just be sure to keep an eye on these three topics come Thursday.