When business school professors look back on this era, they'll likely talk to their students about one of the greatest turnarounds in the history of enterprise. Few companies have gone from near-death to industry titan in such a short time as Ford Motor (NYSE: F). And investors have showed their respect, with shares rising from under $2 in early 2009 to $17 just 20 months later. That's an +850% gain!
But signs are emerging that the party may be over for now. Shares made a quick move from $12 since mid-September (a +40% jump in two months), yet now appear to be hit by some profit-taking since last Monday. There's no doubt that shares have plenty more upside: the stock trades for just eight times projected 2010 profits, and the auto industry is likely to see higher volume down the road. But the coming year still holds real challenges for this auto maker.
Here are five key issues you'll need to track if you own shares of Ford. If these items come to pass and shares slip back to the lower teens, it would create a fresh compelling buying opportunity for long-term investors. [Read my previous analysis, on why Ford can double within three years.]
1. A shaky consumer. Virtually every analyst that follows the auto industry assumes that industry sales will rise by about one million vehicles in 2012 to 13 million, and another million again in 2013. That forecast assumes a steady rise in employment that leads consumers to upgrade their rapidly-aging existing cars. But right now, it's simply unclear whether we are on the cusp of new job creation. Indeed as I noted in this piece, public sector layoffs may be high enough to offset any employment gains in the private sector.
2. Costs are starting to rise. Analysts currently expect Ford's sales to rise +4% in 2011, but profits are likely to be flat. That's because Ford's extended streak of cost-cutting has come to an end, and some costs are starting to rise. A ton of hot rolled steel coil that cost around $400 on average in 2009 is now closer to $600 and it could hit $700 next year, according to UBS. In addition, Ford also secured significant wage concessions when the economy tanked, and labor contracts call for wage hikes in 2011 and 2012. Ford is also expected to pay higher taxes in coming years.
3. Europe's slump could deepen. Ford derives a quarter of its sales in Europe, and here again analysts are modeling for a steady rebound in demand. But outside of Germany and France, European economies remain at risk of falling back into recession as belt-tightening moves to balance budgets dampen economic activity. Ford lost $196 million in Europe in the most recent quarter, and that region could continue to generate losses in 2011, contrary to analysts' expectations of rising European profits in 2011.
4. Benign interest rates may not stay in place. Ford's credit division has greatly benefited from rock-bottom interest rates. First, low rates -- in the 4% to 6% range -- have made for great financing terms for customers. Second, Ford has generated very impressive profit spreads on those rates, with its own borrowing costs well lower than that 4% to 6% figure. If interest rates start to rise, Ford will either have to boost its own lending rates to customers (dampening demand), or take a big profit hit at its highly lucrative Ford Motor Credit division by keeping lending rates intact and making do with smaller spreads.
5. Competition and . Ford, and the analysts that follow it, anticipate continued market share gains on the heels of the new Fiesta model, the soon-to-be-updated Focus and a refreshed Ford Explorer. Yet competitors are also stepping up and could beat Ford at its own game by rolling out even more fuel efficient vehicles. For example, Mazda is working on a series of engines that are expected to 20% to 40% mileage improvements in its next product cycle upgrade. Toyota, Honda and Nissan are all expected to field new offerings with a range of fuel-saving technologies in the next few years as well. Ford had some very impressive technology tricks up its sleeve the last few years (such as the line of EcoBoost engines), and they'll need to do it again to keep pace. A number of analysts are now touting ever-loftier target prices predicated on even more market share gains for Ford -- and that's no sure thing.
Action to Take --> I love Ford. It's a great American story. I loved Ford even more when analysts were writing the company off and missing the obvious signs of a turnaround. Now that Ford is universally loved by analysts and investors, it's helpful to look at the what-could-go-wring side of the equation. In my gut, I know this stock will end up far higher down the road. In the near-term, I am concerned that the company is expected to maintain its track record of unbroken good news. And as I said earlier, if these things happen and shares slip, it would create an incredible buying opportunity for long-term investors.