Ford's Appeal Improves for Investors

NEW YORK ( TheStreet) -- Ford ( F) has grown its global business at a clip that ought to make its American competitor, General Motors ( GM), stand up and take notice.

GM reported a better-than-expected third-quarter profit last Wednesday Oct. 30, but compared to Ford's third-quarter numbers, GM was trumped.

Ford reported on Oct. 24, that the company delivered record third-quarter 2013 pretax profit of $2.6 billion, reflecting continued strong performance in North America and a combined profit from the regions outside North America. In addition, the company's financial arm, Ford Credit, remained solidly profitable.

Total company third-quarter pretax profit of $2.6 billion was $426 million higher than a year ago. Third-quarter earnings per share of 45 cents was 5 cents per share higher than a year ago.

By comparison, GM's third-quarter net income attributable to common shareholders declined to $757 million, or 45 cents a share compared to $1.48 billion, or 89 cents a share, in the year-ago quarter.

"Ford's record results in the third quarter show the strength of our One Ford plan around the world," said Alan Mulally, Ford president and CEO. "Working together, we remain committed to serving customers in all markets with a full family of vehicles, offering the very best quality, fuel efficiency, safety, smart design and value."

Below is a 5-year price chart of Ford's stock and I've included its improving quarterly revenue per share. F Chart F data by YCharts

Ford has a lot to celebrate so far in 2013, including its top-line growth with wholesale volume and total company revenue up 16% and 12%, respectively, compared with a year ago. These are very impressive results. Its growth was supported by year-over-year market share gains in all regions.

Keep in mind that this was Ford's fourth consecutive quarter of top-line growth. Record third-quarter automotive operating-related cash flow was $1.6 billion.

This was also Ford's 14th consecutive quarter of positive operating-related cash flow. It also boasts strong liquidity of $37.5 billion, an increase of $400 million from the end of the second quarter.

In the first nine months of 2013, the company's pretax profit of $7.3 billion was an improvement of about $1 billion compared with a year ago. Ford's first nine months net income of $4.1 billion was nothing short of remarkable.

As for debt, Ford's automotive debt is $15.8 billion as of Sept. 30, 2013 ( as seen on slide 10). Total Ford Credit debt is $94.5 billion as of Sept. 30, 2013 ( see appendix 7).

Much of the debt owed by Ford Credit is actually owed to Ford Automotive. It's not unusual for an auto manufacturer to do this, as explained in the following excerpt from Ford's annual report:

"Most of the vehicles sold by us to our dealers and distributors are financed at wholesale by Ford Credit. Upon Ford Credit originating the wholesale receivable related to a dealer's purchase of a vehicle, Ford Credit pays cash to the relevant legal entity in our Automotive sector in payment of the dealer's obligation for the purchase price of the vehicle. The dealer then pays the wholesale finance receivable to Ford Credit when it sells the vehicle to a retail customer."

To recap some more results, Ford's net income for the third quarter of $1.3 billion, or 31 cents per share, was down $359 million, or 10 cents per share, compared with a year ago, due to pretax special-item charges of $498 million.

Automotive operating-related cash flow was $1.6 billion, a third-quarter record, marking the 14th consecutive quarter of positive performance. The company ended the third quarter with strong liquidity of $37.5 billion, an increase of $400 million compared with the end of the second quarter of 2013.

To get the details for yourself on Ford's third-quarter 2013, I'd encourage you to visit the company's Web site. The third-quarter conference call and all the financial numbers from the quarter are clearly stated; it also includes slides, charts and even an entertaining video celebrating Ford's 100th anniversary of its moving assembly line.

In all fairness to Ford, I want to mention the fact that it didn't go after or receive a government bailout like its rival General Motors during the financial fiasco of 2007-2009. GM was able to emerge from bankruptcy only after receiving $49.5 billion from the federal government in 2009.

Kudos goes to Ford's proactive and focused leadership for guiding the company through a treacherous economic period while avoiding bankruptcy and rebounding as a strong and thriving publicly traded company.

Ford reported at the end of its third quarter total cash of $25.74 billion with a book value per share (most recent quarter) of $4.87 compared to GM's $19.99. Both Ford and GM are making progress to achieve profitability in Europe by 2015, yet Ford outperformed GM in Asia for the third quarter due to a special event that impacted GM's third-quarter results there.

From a shareholder's perspective it still pays to own Ford stock, which offers a dividend yield of 2.31%. This is not only sustainable but with a payout ratio of only 20% of operating income, I would anticipate the dividend to be increased by the end of 2013.

It's beyond the scope of this article to attempt to explain all the aspects of the company's financial reporting. As it's required to do, Ford thoroughly disclosed all of the risk factors that any publicly traded automotive company and its investors might face.

The risk factors in Ford's third-quarter report to shareholders included the possibility of "adverse effects on results from a decrease in or cessation or clawback of government incentives related to investments." The explanation of what this means may be the topic of a future article.

Other risk factors included "failure of financial institutions to fulfill commitments under committed credit and liquidity facilities" and the ominous possibility that the company could face the "inability of Ford Credit to access debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts, due to credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors," the company states.

If owning shares of Ford or GM makes you nervous in today's fast-changing economic environment, it would be prudent, as I've stated in past articles, to set up a trailing stop loss alert system like the one offered by TradeStops.

Receiving timely alerts can help provide a type of "safety net" underneath stock positions in both companies. This helps offer investors an exit strategy to help capture gains and a plan to limit the downside risk of unacceptable losses. This is a part of a wise and careful investing strategy.

After the lessons learned from the worldwide financial nightmare that unfolded in 2007 and 2008, including the factors that led to GM's collapse, investors at least need to consider the risk factors before committing too much investment capital to any auto manufacturer. This is also true for all sectors of the stock market.

Of the two big American auto giants, GM and Ford, I like Ford enough to own some shares in my IRA. If shares correct closer to $16, I'm likely to buy more, as the dividend yield-to-price would be 2.5%. As stated earlier, but bears repeating, with a payout ratio of only 20% it's easy to see why Ford, in my opinion, is likely to increase its dividend.

The analyst community's consensus 1-year price target for Ford's stock is slightly north of $20-per-share barring any unforeseen or other hard-to-predict anomalies. Shares purchased nearer to $16 would possibly have close to a 25% upside capital gains potential while collecting Ford's sustainable dividends.

The immediate future looks bright for Ford as it continues firing on all cylinders and follows the business plans of its exceptional leadership . That is, as long as the economy stays supported by the current Fed monetary policies, or a long-awaited economic recovery ensues.

At the time of publication, Courteney was long shares of F, but positions may change at any time.

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ┬┐herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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