Despite the tumble its shares have taken since the Firestone debacle, the carmaker's prospects -- even in the Explorer lineup -- are solid

By Margaret Popper, Business Week Online Street Wise

NEW YORK, Oct. 31 (Business Week Online) - Investors got understandably jumpy when they first saw news shots of Ford Explorers rolled onto their roofs by the side of the road. Small wonder Ford Motor Co.'s ( F ) stock dropped almost 50% at the beginning of August and has remained in the mid-20s ever since. But investors probably overreacted. A few Explorers may have flipped, but the model certainly isn't playing dead. Sales of the sport-utility vehicle actually continued fairly strong through the third quarter. Without a one-time $500 million pretax charge related to the recall of Firestone tires on Explorers, Ford would have had record third-quarter earnings of $1.1 billion -- 15% higher than the same quarter a year earlier.

Instead, earnings came in at $888 million for the quarter, or 53 cents per share, which is 7% off the $959 million third-quarter earnings in 1999. The company is confident it will meet First Call consensus earnings estimates of 87 cents a share for 2000's fourth quarter, about 5% higher than the 83 cents-per-share earnings the same quarter a year ago.

LONGER LINE LIFE. Of the three U.S. auto giants, Ford isn't the carmaker that analysts are most worried about. "I'm less sanguine about GM," says Joseph Phillippi, automotive analyst at PaineWebber. Phillippi has a $46-a-share, 12-month target price on Ford. It's unlikely auto makers will have the same record sales in 2001 that they're having this year, but analysts still expect U.S. car sales to remain robust -- and Ford will get its fair share. In addition, the company is addressing its problems in Europe. At its current price of around $25 per share, an argument can be made that the stock is now undervalued.

Trucks, which include SUVs, are where it's at in the U.S. auto market, and they've driven Ford's U.S. sales for the past two years. In the first nine months of both 2000 and 1999, Ford sold slightly more than 2 million trucks, vs. car sales of 1.3 million and 1.2 million for the same period of 2000 and 1999, respectively. "Ford, GM, and Chrysler are only making money on trucks," says Phillippi.

Ford has stretched the high margins on its Explorer through careful introduction of new features. Last January, the company switched some of the production lines at its Louisville (Ky.) plant from two- and four-door Explorers to the Explorer SportTrac, a new model with a bed in the back that already accounts for 15% of total Explorer sales.

CONSUMER SLOWDOWN? SportTrac sales kept the line going strong, even through the tough period of the Firestone tire recall in August. "The SportTrac was designed to extend the reach of the Explorer and go after customers that might not have considered an Explorer otherwise," says George Pipas, sales-analysis manager at Ford. As a fresher member of the lineup, it's also cheaper to create marketing buzz for the SportTrac than it is for the five-year-old, four-door Explorer. The four-door is due for a redesign in 2002, which should further extend the model line's life.

Far worse than faulty tires for Ford is slowing consumer demand in the U.S. "Our business rides on the fundamentals that drive [gross domestic product] -- that is to say consumer spending," says Pipas. The past two years, consumer demand drove sales of light vehicles in the U.S. to dizzying heights. By the end of 1999, when 17 million light trucks and cars had been sold, no one thought it could go higher. But this year, auto makers are predicting total sales of 17.5 million units, according to Pipas.

As the economy slows in 2001, Pipas doesn't expect car sales to hit those same heights. "The fact that next year's sales will be lower is not necessarily bad, because it's coming off such a high base," he adds.

A GREENER SUV. Even harder to predict than consumer demand are fuel prices, but Ford has a plan. It recently introduced a new, more fuel-efficient SUV dubbed the Ford Escape that gets more than 20 miles per gallon in city driving and is priced somewhat lower than other SUVs, including the Explorer. Sometime next year, the Escape should be available in a slightly more expensive hybrid (part gasoline-powered and part electric) version for consumers who are environmentally conscious or who can't bear the bite gas prices are taking out of their household budgets.

Ford's European woes have proved more difficult to fix. The company's second-biggest market, Europe accounts for about a third of unit sales. This year, profitability dropped because of the weak euro. But unit sales were also flat for the first nine months of 2000, vs. the same period a year earlier.

Ford lost European market share because it didn't have the breadth of product line it needed to compete, according to PaineWebber's Phillippi. "Ford had several failures [trying] to move into [larger, luxury cars] in Europe," he says. "They had the Scorpio, which was an attempt to get into near-luxury vehicles, but they gave up on it." Ford's most recent new-product introduction in Europe is the Mondeo, a full-size family car that gets rave reviews from auto enthusiasts. But it has so many expensive special features, "it's hard to tell if it'll make money," says Phillippi.

REVVING UP. To bolster its position, Ford has a three-year plan to introduce 45 new products in Europe. It's also slashing overcapacity. It has closed a plant in Plonsk, Poland, and in Britain it has rejiggered its Coventry plant to make Jaguars, while reducing activity in its Dagenham facility preparatory to eventually ending vehicle assembly there. In addition, the company has changed its European management team, which is now being led by Nick Scheele, who is well respected in European car circles. "We believe Europe will be profitable in 2001," says Ford spokeswoman Karen Hampton.

Stronger European performance sure would help. Total earnings could increase almost 13% in 2001, according to Phillippi. He's predicting earnings per share of $3.46 in 2000 and $3.90 in 2001. Worldwide revenues will hit $171 billion this year -- $142.6 billion from vehicle sales and $28.7 billion from financial services. In 2001, Phillippi estimates total revenues will be up 2.3%, to hit $175 billion. Auto sales will increase only slightly by his calculation, to $144 billion, while financial-services revenue will jump 9%, to $31.3 billion.

In the slow-growth car business, that's not too bad. If Ford can hit Phillippi's projections, the stock market may wake up and recognize that the company wasn't destroyed by the Firestone crisis. In that event, investors who buy shares at current prices may find their returns rapidly accelerating.

31-Oct-2000 08:37:57 (03147625)  Copyright 2000 Standard & Poor's Investment Advisory Services LLC. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without prior written consent from Standard & Poor's.