(excerpt)

Ford shares are poised for a Santa Claus rally of their own and a happy new year, as the company’s investments in 2014 start to pay off going into 2015.

Ford always intended 2014 to be a year to invest in itself. The company has done just that, and now stands to benefit from 23 new vehicle rollouts in 2015.

Not surprisingly, earnings suffered, and Ford issued guidance in a September warning that 2014 profits will be lower than expected. This guidance led to a sharp drop in the share price. Even with the recent recovery, Ford shares are relatively flat on the year.

Certainly, investors do not like to see a company’s earnings moving downward for any reason. However, Ford is doing what is necessary to add value for shareholders in the long term. This presents opportunity.

Investing in itself
Ford has made some significant investments in operational efficiency, the new F-150, and the growing market in China.

First, the company is shrinking its number of vehicle platforms. Seven years ago, Ford used 27 platforms. That number will decrease to 15 this year, and Ford anticipates getting to 9 in 2016. This will lead to operational efficiencies and increased margins. However, the capital expenditures to execute this strategy cut into 2014 earnings.

Second, and most importantly, the launch of the all-new aluminum F-150 next month is revolutionary, not just for the truck specifically, but the automotive industry as a whole. The company incurred significant costs associated with launching the truck in 2014. Between R&D, marketing and shutting down their F-150 plant for two months to retool for the launch, earnings were adversely impacted.  

Third, Ford continues to invest heavily in China, the world’s largest auto market. From 2011 through 2015, they are on pace to invest $5 billion. After playing catch-up to General Motors and Volkswagen, these investments are paying off, but ramping up is a temporary drag on earnings. …

F-150
…The Ford F-series is the best-selling vehicle in North America. It’s held this distinction for 32 consecutive years. It’s also a large portion of Ford’s profits. When it gets remodeled, it’s a big deal, especially when it gets an industry-first, new aluminum body. Innovation like this does not come without risk.

Fortunately, Ford appears to have aced the launch. So much so that the F-150 has already been named Kelley Blue Book’s Overall Best Buy for 2015 and has won various other awards. CEO Mark Fields anticipates the new F-150 to be a smashing success. We agree. …

Automotive sweet spot
…Many analysts continue to believe that we are in an automotive sweet spot in the U.S. Contributing to this sweet spot is a record old-age fleet, low gas prices, healthy U.S. economy, increase in consumer spending, and low cost of financing.

Low gas prices may in fact diminish some of the benefits of an aluminum body. However, this is a double-edged sword as consumers will now be less conscious about buying a truck over a vehicle with better MPG. We believe that the positives in this situation outweigh the negatives.

Dividend
Ford’s balance sheet is built tough with just under $23 billion in cash. In the first quarter of 2014 Ford announced a 25% increase in their dividend. With earnings expected to rise, and coupled with a sustainable payout ratio of ~ 44%, we anticipate the dividend growth to continue in 2015. With a dividend yield around 3.3%, and potential future increases, Ford could be the gift that keeps on giving. …


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