Ford Motor Co's fourth-quarter earnings fell far short of Wall Street expectations on higher costs to launch new vehicles like the Explorer, increasing commodity prices and an unexpected loss in Europe, sending its shares down 11.5 percent.
The disappointing results shook confidence in the next stage of the recovery for Ford after a four-year comeback that has seen it surge back from a brush with near bankruptcy to sustained profits and made its shares one of the best performing American stocks since 2008.
It marked the first time that Ford had fallen short of Wall Street profit forecasts in two years.
Anything that comes out that's a tad disappointing, even if it's a tad disappointing inside a great story, is going to be punished, said Bernie McGinn, chief investment officer at McGinn Investment Management, who owns Ford shares.
Excluding one-time items, Ford posted an operating profit of 30 cents per share for the fourth quarter, well below the 48 cents per share analysts had forecast on that basis.
Ford's costs increased by over $1 billion in the fourth quarter from the third-quarter, equivalent to a hit of about $860 for every car and truck it sold.
About a third of the cost surge came from higher prices of commodities including steel while over half came from higher operating costs including the cost of launching new vehicles in its home market.
Morgan Stanley analyst Adam Jonas said the fourth-quarter results provided no new reason to buy the stock and could have negative stock repercussions for General Motors Co and other auto companies.
GM shares were down almost 5 percent in morning trade.
JPMorgan analyst Himanshu Patel said Ford's disappointing fourth-quarter results call into question the idea that Ford's (North American) margins should expand if sales recover as expected over the next few years.
Ford Chief Financial Officer Lewis Booth said analysts had underestimated the additional cost of launching new vehicles like the Explorer SUV and a new model year of F-Series trucks in the past quarter.
Another negative surprise was the performance of Ford's European operations, which the automaker had projected would be profitable. Instead, Europe posted an operating loss of $51 million in the fourth quarter.
At the same time, Ford's market share in Europe dropped to just below 8 percent from nearly 9 percent. Executives said Ford had chosen to sacrifice market share in Europe rather than match competitors by offering deeper discounts in a slack market.
We clearly had overcapacity (in Europe), and we had some pretty irrational economic behavior by some of the competitors, Chief Executive Alan Mulally said.
Ford raised its forecast for 2011 U.S. auto sales, setting a range of 13 million to 13.5 million vehicles. It had previously said vehicle sales could be as low as 12.5 million. It also lifted its forecast for Ford's North American production in the current quarter to 650,000 vehicles from 635,000.
But Booth said that in 2011, the rise in Ford's global commodity costs will be more than the $1 billion rise in 2010.
The slightly better outlook was overwhelmed by concern among most investors over Ford's higher costs, analysts said.
James Daily, portfolio manager of Team Asset Strategy Fund in Harrisburg, Pennsylvania, said that the stock selloff on the fourth-quarter earnings miss on Friday showed short-term investors bailing out.
Ford results were pretty ugly, actually, and the company has been adopted by momentum players, he said. When that happens you need to have the company beat in the quarter and raise its outlook in order to keep moving higher.
Shares in Ford, widely considered the strongest of the U.S. automakers, had gained more than 50 percent from the end of the third quarter.
BALANCE SHEET IN FOCUS
CFO Booth said the steps Ford took to pay down debt in 2010 moved the company toward its goal of returning to an investment grade credit rating.
We're going to continue to work on the balance sheet, Booth told reporters. I think the test -- or the question -- is when we get to investment grade, he said.
Ford last had an investment grade rating in 2005, a year before it mortgaged most of its assets to borrow $23.5 billion. That borrowing allowed Ford to finance new product development while declining government bailouts taken by its U.S. rivals GM and Chrysler Group.
The automaker reduced its debt by $14.5 billion in 2010, reducing its annual interest costs by over $1 billion.
Gary Bradshaw, a fund manager with Hodges Capital Management in Dallas, said he was advising his clients to hold Ford shares, saying he believed management was setting the company up for longer term success by paying down debt and investing in new vehicles.
While he acknowledged that Ford's results were disappointing, he said the prospect of improving U.S. auto sales means Ford will still be hugely profitable.
Full-year net income was $6.6 billion, or $1.66 per share, an increase of $3.8 billion from 2009, and its biggest net profit since 1999.
As a result of the profit, Ford said it would pay profit-sharing bonuses to about 40,600 factory workers represented by the United Auto Workers union. The average bonus would be about $5,000, it said.
Ford shares were down $2.17, or 11.5 percent, at $16.22 on the New York Stock Exchange.
(Additional reporting by Kevin Krolicki in Detroit and Ryan Vlastelica in New York; Editing by Derek Caney, Phil Berlowitz)