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Ford (F) Looks Cheap Now, But Will They Meet Expectations?

Ford Motor Company (NYSE:F), the second largest U.S. automaker, has done very well since the world seemed to be crashing down around the auto industry in 2008.  Since hitting a low of $1.21 late that year, the stock is up 1,047%, one of the most incredible post-crisis rebounds of any stock I’ve looked at.  The low coincided with General Motors Company (NYSE:GM) bankruptcy, and I clearly remember the rumors at the time that Ford would file soon after.  After a run like this, it is only natural to be skeptical about whether or not there is more growth ahead.  With Ford set to report earnings on Jan. 22, the market will be paying close attention not only to Ford’s numbers, but the company’s outlook on the future.

Ford Motor Company (NYSE:F)

Since the crisis, Ford has been very proactive about taking steps to optimize its financial health.  In 2008, Ford sold its Jaguar and Land Rover brands to Tata Motors Limited (NYSE:TTM) for $2.3 billion, and some of the proceeds were used to fund the pension plans whose obligations had long been under-funded.  The company has also been slowly reducing its stake in Mazda, from the 33% stake they began with to the 3.5% stake they own today.  Most recently, the company discontinued its Mercury brand.  These moves allow Ford to concentrate its efforts on its “core” brands of Ford and Lincoln, which have been the company’s most popular and profitable product lines.

Ford’s market share has remained fairly constant in recent years, gaining in 2011, and dropping back a bit in 2012.  According to Ward’s reports, Ford’s vehicles accounted for 11.9% of all cars sold in the U.S. in 2011, versus 12.4% in 2010.  Despite the seemingly lower number, this was the year when Ford discontinued the Mercury brand, so the remaining Ford and Lincoln lines actually gained market share during that time.  A huge player in the truck market, Ford had a 20.9% share of the truck market in 2011, up slightly from 20.4% in 2010.  More important than the earnings number itself will be the company’s discussion of market share, as well as the plans to increase market share going forward.
The general outlook for the automobile industry as a whole, both in the U.S. and abroad, for 2013 is generally positive.  Weaker sales in Europe should be more than offset by the rapidly expanding middle class in China.  In the U.S., auto sales have been on an uptrend for several years, and this is expected to continue into 2013.  According to industry analysts, light vehicle (car) sales are projected to increase from 14.47 million in 2012 to 15.42 million this year, a year-over-year gain of 6.6%.  The truck market is expected to undergo a gradual shift from large pickups to light trucks and SUV’s due to high gas prices, however higher construction activity and infrastructure spending should keep truck demand relatively high.  Look for the company to comment on the industry as a whole.

Ford trades at a pretty cheap valuation, which tells me that there is a good amount of uncertainty in the market about the company’s future.  As of this writing, Ford trades at 10.4 times 2012’s consensus earnings of $1.34 per share, which are expected to increase to $1.46 and $1.83 for 2013 and 2014, respectively.  So, to say that Ford trades at just 7.6 times 2014’s earnings makes the company seem very cheap indeed.  These P/E ratios should increase as time goes on as long as the company is delivering on expectations.  Any disappointment during next week’s earnings call could be a major setback for the company, as well as share price.  However, if the market reacts negatively to Ford’s report, this could create a nice buying opportunity in the most financially sound and responsibly run auto manufacturer in the United States.

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