Ford Looks Ahead to a Solid but Subdued 2012
Headlines in the wake of Ford's (NYS: F) fourth-quarter earnings report on Friday were mixed: While some played up the company's third consecutive annual profit and signs that management expected more profits going forward, others pointed to the fact that the Blue Oval's fourth-quarter profits came in below expectations.
Certainly investors had mixed feelings, as the stock was down over 7% in early trading, only to recover much of that ground by Friday's close. After Monday's trading, Ford's shares are off 3.8% in the two days following the earnings announcement.
So what's the deal? I think this is the real story: Ford's business is mostly in great shape, despite challenging economic conditions. And that's why, despite those challenging conditions, Ford's posting solid profits -- and expects to keep posting them through 2012.
But it won't be easy.
Strong results in hard conditions
Ford's basic business - building great cars and trucks, and selling them at good profits - is working just fine. CEO Alan Mulally's "One Ford" plan, under which Ford has gradually consolidated its regional product lineups to create a single, strong, global suite of products, is beginning to bear fruit.
That plan, which aimed to focus Ford's development resources behind a smaller number of products, ensuring that the quality (and profitability) of each could be maximized, has transformed Ford from an also-ran to a premium global competitor able to take the fight to the likes of Toyota (NYS: TM) and Honda (NYS: HMC) . And this, together with aggressive restructuring, has transformed the company's bottom line. Ford is now able to post solid profits despite economic conditions that would have led to losses a decade ago.
That has served Ford well in recent times, because the world's economies have continued to struggle in the wake of the 2008 economic crisis. Although the U.S. continues to show signs of a sluggish recovery, industry-wide auto sales remain far below pre-2008 levels. Just 12.7 million vehicles were sold in the U.S. in 2011, far below the 16-million-plus that were routine in the years before the downturn.
The fact that Ford has been able to post solid profits despite lower levels of sales shows just how far the company has come in the last five years. And the fact that Ford continues to thrive despite the much more challenging conditions around the world suggests that its core is very strong indeed.
But those conditions will continue to be challenging for a while.
The outlook for 2012: Subdued
Mulally said on Friday that Ford expects global growth in the range of 3% for 2012. That's despite ongoing challenges in Europe, which will remain weak due to ongoing debt crises and government austerity measures. Ford expects to see industry-wide increases in vehicle sales in emerging markets and North America, and expects its market share in the U.S. and Europe in 2012 to be roughly in line with levels seen in 2011.
Mulally expects profits from Ford's automotive businesses to improve in 2012, while profits from Ford Motor Credit will dip a bit -- but the unit will remain solidly profitable, he said. Overall, the company expects its 2012 profits to be comparable to those seen in 2011. Structural costs will increase a bit to support higher volumes, new model launches, and expansion for global growth (those factories in China), but operating margins should improve.
That's not as exciting as the big year-over-year gains in profit Ford had been posting every quarter, but continued solid profitability in challenging conditions isn't a bad thing at all. With Ford poised to resume its dividend, the company's transition from "train wreck" to "dramatic turnaround story" might soon enter another phase - "boring blue chip" - that could see the stock stabilize at a higher level.
Encouraging signs, progress toward goals
Ford's debt remains fairly low at $13.1 billion, down $6 billion from the end of 2010, and its "automotive cash" -- its term for cash on hand outside of its lending arm - was $22.9 billion at year-end. Its global pension liability stands at $15.4 billion, CFO Lewis Booth said on Friday, but Ford will reduce that by about $3.5 billion during 2012 and expects pensions to be "fully funded within the next few years."
Most importantly for longer-term investors, Mulally and Booth strongly reaffirmed that Ford remains on track to achieve its "mid-decade outlook." That's a statement of Ford's goals, released last year, that call for significantly higher margins - 8% to 10%, up from 5% to 6% in recent quarters -- and global sales around 8 million vehicles annually. Those sales levels would put it within striking range of Toyota and Volkswagen, and not far behind 2011 sales champ General Motors (NYS: GM) , which sold just over 9 million vehicles last year.
And last but not least, Ford confirmed that it has restored its long-suspended dividend, with the first payment due in March. But you don't have to wait until March to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts have identified "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers, but only for a limited time, so get instant access now.
At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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