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Published: July 27, 2010
In many respects, the auto industry remains
in a funk. Industry sales remain well below previous peaks,
competition has never been more fierce, and the need to spend
heavily to develop future technologies like electric cars are
all creating profit headwinds. In that light, Ford Motor's
(NYSE: F) just-announced second quarter pre-tax income of
$2.1 billion is quite remarkable. It's hard to find another
company that has made so many smart moves to escape the clutches
of creditors and win back the hearts of consumers.
We took a look at Ford back in early June. Shares have risen
+15% since then, but the biggest gains lie ahead. That's because
Ford is on the cusp of becoming an earnings powerhouse. And if
you have a three-year time horizon for an investment, this is
shaping up to be a two-bagger from current levels.
Quarterly Results Set the Bar
A look at last Friday's quarterly earnings release gives a sense
of where Ford is now -- and where it's headed. The auto maker
earned $0.68 a share, 70% higher than the consensus estimate.
But we've seen this before -- Ford has blown past estimates for
six straight quarters. It's not because analysts are incapable
of extrapolating sales and cost trends to develop accurate
forecasts, it's just that Ford keeps uncovering more ways to
exceed the high bar it has already established.
In some quarters, management finds ways to reduce costs even
faster than analysts had expected. In other quarters, Ford is
able to maintain price increases that exceed even the most
bullish forecasts. This time around, Ford surprised the street
by positing very impressive profits on its small cars, which
historically carry low profit margins. The fact that Ford
delivered $2.1 billion in pre-tax profits in the second quarter
represents not just an improvement on recent results, but is
better than any full-year profit the company has posted in nine
of the past 10 years.
At this point, Ford no longer needs to keep delivering
unexpectedly good news. It simply needs to maintain its current
operational metrics and let the economy do the rest. During the
next few years, analysts expect car sales to rebound as
unemployment slowly falls and aging cars need to be replaced.
Nearly 17 million cars and trucks were sold annually throughout
much of the last decade. That figure stands at around 11 to 12
million today. We may never see industry volumes surge back to
that 17 million mark, but if they rose to 14.5 million, or +25%
above current levels, then Ford's profits could make a dramatic
upward move. This is a business with very high fixed costs, so
each incremental car sold brings plenty of profit to the
bottom line. Cars typically carry $2,000 to $3,000 in gross
profits, while trucks can generate twice that amount.
It's worth noting that recent results
contain very tepid truck sales, in large part because people
working in the construction trade are sitting idle, awaiting an
upturn in housing and commercial construction. When construction
activity gets back on its feet, so should demand for these
high-margin trucks. Ford stands ready for that upturn, having
just released a new line of F-Series Super Duty trucks.
Building a head of steam
The fact that Ford was able to post break-even results in 2009
was considered a minor miracle in light of the cross-currents
roiling the global economy. As analysts began to look into 2010,
few thought the company could earn upwards of a dollar a share.
A string of great quarters has put that concern to bed. Look for
2010
EPS forecasts to rise very sharply in coming weeks, from the
current $1.35 consensus to past the $1.70 mark. Forecasts for
2011 per share profit could approach $2.25 and in 2012 or 2013,
depending on when the
unemployment rate drops and auto sales pick up, EPS could
approach $3.00.
Action to Take --> Of
course, cyclical businesses never garner a high
P/E ratio, but isn't Ford worth more than four times
potential 2012 or 2013 profits? A target of six implies +50%
upside, but I'm betting investors eventually come to believe
that Ford should be worth eight to 10 times that long-term
profit view, meaning the stock price could at least double from
here.
-- David Sterman
Staff Writer
StreetAuthority |
