3 Reasons to Worry About Ford

Ford's (NYS: F) turnaround story has been one for the history books. Left for dead in a sea -- make that an ocean -- of debt just a few years ago, today the Blue Oval has cash in the bank, big profits, and a great lineup of products that are finding happy new buyers in markets around the world.

It's been a great story, and one consistent theme has been superb execution: CEO Alan Mulally and his team have done just about everything right.

I expect that to continue. But that doesn't mean there aren't reasons to worry about Ford. Here are three.

Reason No. 1: If the U.S. economy slows, so will Ford
Let's get this straight up front: I own Ford stock and have no plans to sell. I think there's a pretty good case for buying Ford right now (a case I've made a couple of times recently), and I don't think any of these issues will put the company at risk.

That said, there are reasons to be careful. Here's a big one: Right now, Ford is heavily dependent on the fortunes of the U.S. economy. My Foolish colleague Dari FitzGerald recently put together an excellent infographic that makes the point very clearly: While Ford sells vehicles all over the world, and is investing heavily to expand production in Asia, much of its revenues are still generated here in the United States.

That makes Ford's profits vulnerable to a U.S. economic downturn. Ford is unlikely to swing sharply into the red, thanks to its restructuring (and ruthless cost discipline) that ensures that it will at least break even as long as U.S. auto sales don't fall off a cliff. But if the U.S. auto-sales rate falls significantly from current levels, expect the Blue Oval's profits -- and share price -- to suffer accordingly.

Reason No. 2: The competition is ramping up
Ford was able to gain a lot of market share here in the U.S. in 2010 and 2011. A lot of those gains had to do with the strength of Ford's products: The borrowing spree that Mulally initiated in 2006 meant that Ford had the cash to continue new-product development through the worst of the economic downturn, while rivals such as General Motors (NYS: GM) were forced to cut heavily and even mighty Toyota's (NYS: TM) products were slowed.

That meant that Ford's seriously improved new products hit the market before rivals were able to respond, and that meant that Ford was able to rack up big sales gains. Those gains were helped further last year by the tsunami-related production disruptions that caused shortages of key Toyota and Honda (NYS: HMC) models, leading longtime Japanese-car loyalists to consider alternatives such as Ford's acclaimed Focus and Fusion.

But the competition has intensified as of late, and Ford's market-share gains have eroded. Toyota is back at full strength, riding big sales of its strong new Camry and expanded Prius lineup and making aggressive moves to regain lost ground. Meanwhile, GM's own product-development engine has turned out several strong new entries, and a slew of new products -- including all-new pickups -- is expected from the General in coming months. And strong new cars from Hyundai, its corporate cousin Kia, and Volkswagen (OTC: VLKAY) -- which is making a big push to become the world's largest automaker -- will also continue to challenge Ford's strength in its home market.

Ford's recent products are strong, and I expect the Blue Oval's strength to continue as new entries like the upcoming Fusion are rolled out around the world. But the competition is a lot tougher than it was even a year ago, and Ford will have to fight harder -- and possibly spend more -- to win each sale. That will make further sales growth in developed markets a challenge, and it could hurt margins and profits around the world.

Reason No. 3: Europe could become a bigger problem
Ford hasn't been doing particularly well in Europe lately -- it lost $149 million in the region last quarter alone -- but given the economic challenges facing many European countries, Ford's hardly alone. In fact, Ford has been doing better than many rivals, thanks to the competitive strength of its Fiesta and Focus small cars, both among Europe's top sellers.

But while Ford hasn't yet had to confront the possibility of the contentious factory closings that are probably inevitable for GM, PSA Peugeot Citroen, and other regional rivals, a significant further downturn could drive sales down and losses up sharply. Precarious situations in Greece, Spain, and elsewhere mean that such a downturn is very possible -- and that could turn small regional losses into bigger ones for the next several quarters.

Again, Ford's survival isn't threatened here. But if the company's ride-it-out strategy proves to be unworkable, restructuring could be necessary -- and that would be an expensive distraction that could hit Ford's stock price pretty hard.

The upshot: Proceed with eyes open
Here in 2012, Ford is a strong company with excellent products, great management, and a solid balance sheet. But it's in a fiercely competitive, low-margin industry, and as we've seen, its profits are threatened by economic storm clouds here and elsewhere.

Does that mean you should avoid the stock? No. But for current shareholders, and for those thinking about becoming shareholders, it does mean that these are situations that warrant careful, ongoing attention.

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, has recently reinstated its dividend, and has done a remarkable job paying down its debt. But despite this, Ford's stock price is down 19% over the past year. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Get instant access to this premium report. Or if you'd rather take a look at a high-growth company outside the cyclical manufacturing sector, check out our special free report, "The Motley Fool's Top Stock for 2012," which features a company our chief investment officer uncovered that's revolutionizing commerce in Latin America.

At the time thisarticle was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at@jrosevear. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.