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Ford: Non-Cash Items Cloud 2013 Results, What To Do With The Stock?

 January 31, 2013 09:59 AM

(By Mani) Ford Motor Company (NYSE: F) reported mixed quarterly results, with fourth-quarter profit and sales topping Street view, but its 2013 results would be marred by $2 billion European loss and $1.2 billion in non-cash charges.

As a result, Ford shares dropped about 5 percent Tuesday and continued its downturn on Wednesday.

So several investors wonder what to do with the stock?

"We view Tuesday's sell-off (-4.6%) as overdone, but it does de-risk the earnings revisions (buy and sell-side) that needs to occur," RBC Capital Markets analyst Joseph Spak wrote in a note to clients.

Investors should focus more on the cash earnings, which remain strong. The company has emerged as a best-in-class automaker, and the dividend yield of 3 percent provides valuation support.

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Looking ahead, Ford's North American profitability appears sustainable while European restructuring actions should get that region back to break-even by mid-decade, and future growth in Asia-Pacific will leverage current investment.

"We still view Ford as a good mid-term investment," Spak noted.

Dearborn, Michigan-based Ford's initial 2013 outlook calls for 2013 pre-tax profit to be about equal to 2012 levels of $8.0 billion, a bit shy of current consensus of $8.26 billion. The delta appears to be driven by Europe with Ford now guiding the 2013 loss to about $2 billion versus prior guidance of even with 2012 levels.

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On the positive side, North America (NA) profitability is expected to be higher in 2013 with about 10 percent margins.

"We believe the guidance could prove a bit conservative in North America considering the strong line-up, expected share gains and rational pricing," Spak said.

However, the $1.2 billion in non-cash expenses are expected to impact profitability, margins in 2013.

In North America, approximately $475 million in non-cash items are from run-offs of benefits from amortization of previous OPEB restructuring and asset impairments. Pension expenses in the region are also expected to be up $300 million in 2013, due to the lowered discount rate compared to 2012.

In Europe, non-cash expenses in 2013 are expected to be about $500 million, due to higher pension expenses and accelerated depreciation. The majority of these costs stay in the cost structure and pressures EPS, the accelerated depreciation in Europe should reverse out in 2014.

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