|
Published: June 8, 2010
You can't blame investors for bagging
profits on big winners. Many investors that bought into Ford
Motor Co. (NYSE: F) back when shares traded for the price of
a Big Mac have been exiting the stock recently as it looked like
the fast gains had been made. But for those focused on the
long-term, the recent -20% drop in the stock creates an
opportunity to jump in before shares post their next round of
gains.
Much ink has been spilled about Ford's impressive management
team led by CEO Alan Mullaly. They had exquisite timing in 2008,
leveraging every asset the company had to raise cash, right
before the economy contracted. Had they not done so, Ford would
likely have needed to declare bankruptcy along with its
beleaguered peers in Detroit. Even more remarkably, Ford didn't
skimp on product development spending even when money was tight,
and is now bearing the fruits of that gutsy move.
To be sure, Ford's car and truck plans are the keys to this
stock. As investors saw the strong promise of its new Focus,
Fiesta and Taurus models, along with solid quality ratings from
Consumer Reports and J.D. Power, they pushed shares up towards a
52-week high. More recently Ford has been quiet about product
development plans, and shares have begun to drift lower. Yet
Ford is expected to talk about its next group of new vehicles in
coming months, most notably a refreshed Ford Explorer.
Consumers may have lost interest in SUVs, but the new Explorer
will be what is known as a CUV, or Crossover Utility Vehicle --
think the ruggedness of a truck and the frugality of a car.
Plans for a 4-cylinder turbocharged engine shows that Ford now
knows that a reliance on thirsty, large vehicles no longer makes
sense. Production is set to start later this year.
A year from now, Ford will start selling electric-only versions
of its Transit Connect minivan and Focus. It's hard to gauge
potential demand for these vehicles, but Ford insists they will
be far cheaper than GM's much-heralded Chevy Volt.
As Ford refreshes its line-up and continues to rack up
impressive quality ratings, customers are starting to return.
The auto maker had seen its U.S.
market share slip from 20% in 2003 (when pickup trucks and
SUVs were in vogue) to just 14% in 2008. Since then, market
share has steadily risen to 17.3% as of May.
The key variable for analysts is where market share will be in a
few years. Many have long assumed that the Japanese and Korean
auto makers had made permanent market share gains at Ford's
expense. They figure Ford will control 15% of the U.S. market.
But what if Ford's recent market share gains can be sustained
and can trickle a bit higher to 18% by 2012? That would force
analysts to once again boost their profits forecasts (which they
have been steadily doing for much of the past two years).
Profit
Potential
Thanks to the recent
pullback, shares of
Ford trade for less
than 10 times
projected 2010
profits and seven
times projected 2011
profits. Looking
further out, Ford is
leveraged to even
higher profits -- if
auto sales continue
to rebound. Back in
the middle of the
last decade, U.S.
consumers bought 17
million cars and
trucks every year.
That figure fell
below 10 million
last year, but is
slowly creeping back
up. Analysts expect
the industry to move
11.0 to 11.5 million
units this year, and
11.5 to 12.0 million
units next year.
Ford has cut its
expenses so sharply
that it no longer
needs a booming
industry to show
sharp profits. If
Ford could simply
maintain its current
17% market share,
and annual unit
sales approach 14
million units, then
domestic operations
alone could throw
off about $3 a share
in net profits.
Domestic sales
account for just
half of sales, with
a little more than a
quarter of sales
coming from Europe
and about 20% from
the rest of the
world. The European
economic slide
likely means that
Ford would be glad
to break even in
that market during
the next few years.
If and when the
European economy
rebounds, it would
only add to Ford's
profitability.
Remaining
Hurdles
Despite the
impressive
turnaround, Ford
is not out of the
woods. The auto
maker will need to
either refinance or
pay off $6.7 billion
in revolving loans
and $5.3 billion in
term loans by the
end of 2013. That
shouldn't be a
problem if the
economy stays on its
feet, but if we are
hit with another
sharp recession and
credit markets
tighten up, then
Ford will need to
sell more stock.
Recent equity
offerings have been
the one clear
headwind for the
stock. When
management can
finally come out and
say that all future
debts will be paid
out from
cash flow or
simply rolled over,
shares should post
an impressive rally.
Action to Take
--> Once
investors are clear
about any remaining
dilution, they
should start to
focus on the
potential $3 a share
in earnings power.
Assuming shares
trade up to eight
times that figure,
then they would
double from current
levels.
The next leg up in
the stock won't
happen in meteoric
fashion as we saw in
2009, and it may be
several years before
shares trade up to
that target. But
despite the
impression that the
recent pullback may
give, this is a
company with an
excellent management
team and a
well-regarded
product line-up in
an industry that is
just getting back on
its feet.
-- David Sterman
Staff Writer
StreetAuthority |
