Ford Says Things Are Looking Up

It's understandable if investors in Ford (NYSE: F  ) might approach next week's fourth-quarter earnings report with some trepidation. After all, the company uncharacteristically missed big a year ago, reporting earnings of just $0.05 a share after higher commodities costs and troubles in Europe ate into profits.

Commodities costs and troubles in Europe have been troublesome themes for Ford since then, but fortunately for shareholders, the company's bottom-line results for the quarter should be a bit different this time around.

High expectations for a traditionally challenging quarter
Ford recently reiterated its guidance for the quarter, saying that it anticipates profits of $0.26 a share. That's a sizeable number for what is traditionally Ford's (and other automakers' -- General Motors (NYSE: GM  ) had a subdued report last year as well) weakest quarter. The last quarter of the calendar year typically challenges automakers for a couple of reasons:

• Incentives tend to be high as dealers clear out the previous model year's inventory with "year-end sales events" and the like. Incentives, those "cash back" and "zero percent financing" deals one sees advertised on TV, are typically funded by the automaker and can eat deeply into margins.
• Costs tend to be high as automakers roll out new models. The costs of launching a new model include substantial marketing expenses, of course, but also include things like factory downtime as tooling is changed over to produce the new-generation vehicles. Last year, Ford's launches of the all-new Focus and Explorer (and a major refresh of its F-series pickups) cost it big. This time around, the company is launching new versions of the Escape SUV and the Fusion sedan. Both of them are major entries that will incur expenses -- but in the case of the Fusion, some of those expenses may appear in the current quarter rather than in the fourth quarter of 2011.

It won't be a surprise if Ford CFO Lewis Booth tells us next week that that those kinds of factors weighed somewhat on fourth-quarter results. While $0.26 a share would represent a strong year-over-year improvement, it's considerably less than the $0.41 Ford earned last quarter.

With Ford's sales results strong through year-end, I expect to be hearing some good news from Booth and CEO Alan Mulally during next week's call. But that doesn't mean there won't be trouble spots.

Points of concern as we head toward earnings
Here are a few of the things I'll be listening carefully for as Ford's leadership sums up the quarter.

• Incentives spending. Ford has done an admirable job of reducing its spending on incentives in recent years, but an incentives war may be under way as Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) seek to regain lost market share after a year of production disruptions. This may be more of a problem going forward than it was in the fourth quarter, but it's worth watching closely.
• Asia. Ford's recent guidance indicated that its Asia-Pacific region -- dominated by China and India -- was expected to post a full-year loss. There could be good reasons for that (a stepped-up effort to expand production by building new factories in the region) or bad reasons (pressures on margins), or both. It'll be worth listening carefully to the details here.
• Europe. Ford's European operation, like GM's, has come under pressure as economic fundamentals have deteriorated in the region. While Ford's unlikely to consider the kind of massive overhaul GM is expected to undertake with its Opel branch, I'll be listening closely as it explains the steps it is taking to improve results in the region.
• Margins generally. Last quarter, Booth warned that Ford's full-year margin might come in below 6% thanks in part to losses on derivatives Ford was using to hedge against rising commodities prices. That news hit the stock hard despite strong results on other fronts. Higher margins have long been expected to be a key fruit of the company's "One Ford" turnaround plan, and with most of the pieces of that plan now in place, Ford's results for 2011 on that front -- and, importantly, guidance going forward -- could have a big impact on the near-term outlook for the stock.

All that said, Ford's recent guidance should give shareholders cause for optimism. Despite economic conditions around the world that continue to be challenging, the Blue Oval is clearly shifting into high gear as the last pieces of its impressive, globalized product line head into production.

And last but not least, I'll be listening for details of Ford's upcoming dividend payment, its first since September 2006. That dividend should arrive in March -- but you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts have identified "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers, but only for a limited time, so get instant access now.