An Up and Down Year for Ford

In many ways, 2011 was a solid year for Ford (NYS: F) . The Blue Oval continued to execute well on its vaunted "One Ford" turnaround plan, the all-new Explorer and Focus found plenty of praise and willing buyers, the UAW was in a helpful mood for once, and the company continued to gain ground and find growth in markets around the world.

But it wasn't without challenges: An early earnings miss, continued economic headwinds (especially in Europe), and a failure -- for whatever reason -- to fully capitalize on the opening left by key Japanese competitors' supply issues made some aspects of 2011 a year to forget for Ford -- and for its shareholders.

The elephant in the trading room
While I predicted that Ford's momentum would slow in 2011, there's no getting around it -- for Ford investors, 2011 was a rough ride, plain and simple. The stock peaked at almost $19 on Jan. 27, the day before Ford's Q4 2010 earnings were released...but it has all been downhill from there, with the stock mostly stuck in the $10-$12 range since midsummer.

That trip downhill started with an earnings miss on the 28th, a surprising misstep that CFO Lewis Booth attributed to several factors, two of which would haunt Ford throughout the year: volatile commodities prices and troubles in Europe.

The issue with commodities late last year, and to some extent well into 2011, was an industry-wide one: Commodities prices rose quickly and squeezed automakers' margins. Ford's improved quality has improved its pricing power, and Ford was able to raise prices somewhat to compensate, but it (and most other automakers) was able to employ other strategies as well. Most automakers can and do hedge against commodities price increases by buying derivative securities that will rise in value as commodities prices rise. That helps to smooth out market disruptions and preserve margins.

But that strategy can backfire, too, as Ford discovered in September when sharp drops in the prices of copper and aluminum forced it to take an on-paper loss to account for the drop in value of its derivatives holdings, a loss that took a $350 million bite out of earnings and will likely keep Ford's margin under 6% for the year.

A looming problem: Europe
The problem in Europe -- for Ford, General Motors (NYS: GM) , and other automakers -- is that profits have been clobbered by a combination of economic woes and high fixed costs. Ford was able to restructure its North American operations to ensure profitability even through a deep economic downturn, but restructuring Europe -- with its high labor costs, strong unions, and patchwork of government regulations -- has proven to be more of a challenge.

Ford Europe doesn't face the massive structural challenges that GM's Opel unit does, but it did lose money in the region last quarter despite strong sales. The problem is economic: While Ford's cars are selling well, the company has had to offer margin-eroding incentives to keep prices competitive with rivals who have been discounting heavily to entice cash-strapped consumers to buy.

Still, Booth said after last quarter that the company still expects Europe to post a (likely very small) profit for 2011, and the company's continued product strength and the economies of scale afforded by its streamlined global lineup should help matters in 2012 -- as long as the European economy doesn't take a sharp turn for the worse.

Strong cars and labor peace
All that said, there was plenty of good news in 2011, enough that many investors have started to see Ford shares as an intriguing value opportunity. The all-new Explorer and Focus arrived at dealers, got mostly rave reviews, and have been selling extremely well -- at premium prices. While early production snags limited availability of the Focus over the summer -- and might have prevented Ford from taking better advantage of supply woes at Toyota (NYS: TM) and Honda (NYS: HMC) -- the car has been very well received, placing at or near the top of many comparison tests.

And while much hand-wringing preceded the opening of contract negotiations with the United Auto Workers (and more hand-wringing followed, as workers voted), the upshot -- a deal that gave workers more money while preserving Ford's hard-won low breakeven point -- was ultimately a big win for the Blue Oval.

Finally, Ford continued to look for growth in markets all around the world, expanding sales of its increasingly well-regarded global model lineup in places like Russia, China, and South Korea. While Ford's presence in the major emerging markets is still relatively small, the company has big plans to expand -- and as its turnaround matures, that may be the next big story for Ford in coming years.

Last, but not at all least for shareholders, Ford's dividend is finally set to return after a five-year absence. You'll have to wait until March to collect it -- but you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers -- click here to get instant access.

At the time thisarticle was published Fool contributorJohn Rosevearowns 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 serviceshave recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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