Earnings Preview for Ford Motor Company (F) 3Q 2010

Overview

• Ford Motor Company (F) is scheduled to report third quarter 2010 financial results at approximately 7:00 a.m. EST on Tuesday, October 26.  At 9:00 a.m. EST, the company will host a conference call for the investment community and news media.  In addition, at 11:00 a.m. EST Ford Motor Credit Company will host a conference call for fixed income analysts and investors.

Outliers & Strategy

• Ford Motor Company (F) is the second largest auto manufacturer in the U.S. and fourth largest in the world.  Ford experienced a dramatic decline in market share following the mid 90’s, caused by costly manufacturing facilities, pension obligations, high fuel prices, and stagnant sales.  In the past several years, Ford has launched a massive turnaround by improving operational efficiencies, developing a smaller, more fuel efficient product line and consolidating its brands.
• The stock is highly volatile, with an average 5% price move on the day of the release.  In addition, volume tends to be very high as well, with an average of 260M shares trading hands, nearly 4x average volume.
• In the previous three quarters, Ford posted results that exceeded consensus (EPS) estimates by an average margin of 60%.  Factoring this into the upcoming report, more weight should be placed on the top-line revenue number.
• On October 1, Ford announced its monthly sales report for September.  The company said that Ford, Lincoln and Mercury sales were up 46% versus a year ago and that its retail market share increased for the 23^rd time in the last 24 months.  Ford credited the results to its expanding line of fuel-efficient vehicles and a strong international growth strategy.
• Following the September sales release, Morgan Stanley issued a very bullish outlook, naming Ford its “Best Idea” and placing a $20 price target on the stock, nearly 50% higher than the current price tag.
• The long awaited initial public offering for General Motors is set to be among the largest ever.  Ford shareholders have some reason for concern, as mutual funds and institutional investors may reallocate holdings from Ford to GM in order to spread investments out over the sector.  Ford executives are not overly concerned, as treasurer Neil Schloss said, “I think it’s muted.  We have to continue with our results, and if we do, our investors will stay with us.”
• Consensus estimates are calling for (EPS) of $0.37, but current “whisper” numbers are pointing to $0.40.  Note that Ford usually has one-off items during the quarter and that Adjusted Earnings Per Share (EPS) is the appropriate measure for comparison.

Recent News

• 10/16:  Sources speculate that Ford is planning to cut most of its 11% stake in Mazda. Reuters
• 10/14:  Deutsche Bank upgrades to Buy with a $19.50 price target, citing Ford’s ability to contain costs and a “high probability of a cyclical recovery in the North American auto sector.”
• 10/14:  A bullish options investor purchases 32,500 calls at the November $15 strike.
• 10/11:  S&P upgrades to Buy with a $16 price target.  The firm also raised (EPS) estimates to $1.68 for 2010 and $1.87 for 2011.
• 10/08:  Moody’s raises Ford’s credit rating two levels to Ba2 from B1, saying the company is “well positioned to continue generating strong earnings and cash flow through 2011.”

Chart Review

• Shares are up 12% since the September sales release on October 1, soaring through the August highs before consolidating in the $13.80 area.
• The RSI and MACD are suggesting that momentum is a bit exhausted after the sharp rally.
• If the stock can break through $14, there is limited resistance until the 52-week high of $14.57.  The August highs at $13.25 are near term support.

Summary

Ford Motor Company (F) is in the midst of a dramatic corporate turnaround; highlighted by a shift to smaller, more fuel efficient cars, focusing on core brands (Ford, Lincoln, and Mercury), trimming costs and aggressively expanding overseas.  The investment community is highly optimistic heading into the 3Q report, but the October rally may have overextended the shares and if Ford does not deliver results that strongly exceed expectations, traders will “sell on the news.”