Ford's Having One of its Best Years Ever, But Not in America

Do you believe stock prices follow earnings?

I do. Show me a company that grows its earnings quarter-after-quarter, year-after-year ... and I'll show you a company whose stock is headed higher.

That's why thousands of analysts and other investment professionals devote their lives trying to forecast a company's quarterly profit report.

However, no matter how intently a Wall Street hotshot gazes into his crystal ball, predicting the outcome of a company's quarterly results is a very imperfect science. Some would argue that attempting to do so is a fool's game.

There is, however, another way to figure with whom and where to invest your money that I feel is not only more-reliable but also more-profitable.

Here's what I'm talking about.

Instead of trying to figure out the fortunes of any individual company, I think you'll find more success by identifying what parts of the world are experiencing the most growth.

Think of it this way: If you believe stock prices may follow earnings, then you should also believe that earnings follow GDP.

It isn't easy for a company to grow its earnings if the country where it operates is in a recession.

However, a rising tide does indeed lift all boats. So companies that do business in thriving, prosperous countries have the fundamental wind at their backs.

Let's take a look at Ford's (F) most recent quarterly report and see what clues we can find.

Headline: 'Best Years Ever'

Ford delivered its fourth-quarter earnings report last week and it was better than Wall Street was expecting. Ford reported $3 billion of profits on $35.1 billion of sales and earnings per share that were 3 cents above expectations.

Business was so good that Ford announced that it would pay an $8,000 bonus to each of its 47,000 hourly workers and called 2013 "one of the company's best years ever."

No question, Ford had a pretty good quarter. However, the devil is always in the details and there was some very valuable information buried below the headlines. Here's what I'm talking about:

Ford's better-than-expected results are not because of the U.S. In fact, Ford reported that its North American pre-tax earnings fell by $200 billion to $1.7 billon last quarter.

The reason for the shrinking profits is that the average vehicle price in North America actually declined -- the first such decline in five years. Ford even warned that price pressures in the U.S. would be "slightly unfavorable" in 2014.

The U.S. wasn't the only part of the world where Ford struggled. Ford reported a $126 million loss for its South American operations and a $571 million loss in Europe.

So ... business in North America, South America and Europe wasn't so hot. How in the heck, then, was Ford able to deliver such strong results?

Asia!

Ford's profits in Asia jumped by more than 170%!

China, in particular, was red-hot.

  • Sales jumped by 50% in China, which is the world's largest auto market, in the fourth quarter.
  • Ford increased its market share of the Chinese market from 3.2% to 4.1% over the last 12 months.

  • Ford sold a record-high 935,813 vehicles in China in 2013. To put that number in perspective, Toyota sold 917,500 cars and Honda sold 756,882 vehicles. Yup ... Ford outsold Toyota and Honda in China.
  • Ford is even cashing in on the commercial vehicle market, selling 230,006 units, a new record, and 15% year-over-year improvement.

Clearly, the catalyst behind Ford's strong earnings report was its strong sales in Asia.

How does that knowledge help you make money?

Ford's Profit Drivers Aren't Made,
Or Even Born, in the USA

First, Ford is the latest in a pretty long line of companies that is struggling in the U.S., South America and Europe.

Second, there is an even longer line of companies doing gangbuster business in Asia.

Conclusion: If you want to make money in the U.S. stock market, you better make sure the companies in your portfolio have a targeted, effective Asian sales strategy.

In fact, I think the single-most-important statistic to look at is what I call the ABR or Asian Business Revenue indicator.

You need to look at the quarterly earnings reports of every company you own and see if the percentage of their sales to Asia is rising or falling. That number is clear as day in every company's 10-K filings; you just have to look for it.

Companies with accelerating Asian sales are most likely to deliver positive earnings surprises. Meanwhile, companies with shrinking/stagnant Asian sales are increasingly delivering negative earnings surprises.

As you know, stocks that don't meet expectations get killed.

And stocks that exceed expectations ... make their shareholders a lot of money.

Best wishes,
Tony Sagami

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Posted 02-03-2014 11:51 AM by Tony Sagami
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