Ford stock confirms attitude toward earnings shortfall

Update Jan. 27, 2012 6:30 p.m. Ford Motor Company (NYSE: F) stock closed today at 12.21 down from Thurs. close of 12.79. Still, the concern over the earnings report filled the web and the airways, including Jim Cramer on CNBC's Mad Money. He noted that Ford had "overpromised and underdelivered." In other words they used OPUD when they needed UPOD (under-promise, over deliver). In my mind that means Ford, despite its great technology and product offerings, needs to temper its enthusiasm when it deals with the public, especially its equity constituents.

For sure, how the market reacts to news of earnings is more important than the news itself. Such was the case with Ford stock this morning, which reported annual and quarterly earnings as a mixed bag. The daily chart here replaces my earlier, intra-day 15-minute snapshot around 10:30 a.m. showing pre-market and the open in New York.

In pre-market trading, Ford stock dropped on the earnings news down to the 11.81 level. By the time Ford Motors Company (NYSE: F) stock opened in New York, though, the stock was recovering from its low of 11.79, which was well below Thursday’s close of 12.79 for a drop of 7.8 percent.

According to the earnings release early Friday morning, Ford reported its best annual earnings since 1998. For the record, that makes 2011 the second most profitable year in the company's 109-year history. However, stock analysts look between the lines and search where and how the income was derived.

One look at the balance sheet and you can see much of the profit appears to be attributed to a non-cash gain. According to CNN/Money, Ford put a large tax credit from past losses on its balance sheet that will shield it from taxes in the future.

In my opinion, that is certainly a legal accounting move, but stock traders and investors want profits to be earned the old fashioned way, by truly earning it with product sales.

Excluding that credit, Ford actually posted full-year and quarterly earnings that fell short of last year's profit as well as analysts' forecasts. Neither is good from a trader’s viewpoint.

Analysts at this time of year are looking at two key areas: annual earnings and quarterly earnings.

Ford’s 2011 net income of $20.2 billion was up from its net income of $6.6 billion in 2010. About $12.4 billion of the latest profit came from the accounting gain. Excluding special items, Ford reported operating income of $6.1 billion, or $1.51 a share, down from the $7.6 billion, or $1.91 a share, it earned on that basis in 2010.

Fourth-quarter operating earnings of $787 million, or 20 cents a share, were down from $1.2 billion, or 30 cents, a year earlier, as flooding in Thailand had shut suppliers' plants which hurt its results in its Asia-Pacific region. According to analysts surveyed by Thomson Reuters, forecasted earnings were to be 25 cents a share. That’s a miss of 5 cents per share or 20 percent.

Still, Ford has great products and a bright future. However, one can see that the analysts expected more quality in Ford’s earnings besides an accounting maneuver.

Chart View

Last time I wrote about Ford stock, (Read: Based on the NAIAS 2012, why is Ford stock still trading so low? ), I asked the question: How far might Ford stock move per this wedge breakout? I noted that market technicians like to use the distance from the pattern’s initial swing low or high followed by the level at which the breakout passes the wedge line for a target. In the case of Ford stock, we had the major swing high and low as potential targets. Furthermore, the October swing high of 12.65 stood as a major resistance. If that level was breached, the 52-week midpoint of 14.01 was then feasible; but that depended on the volume of new buyers that may or may not come into the market at that point.

Now that we have earnings news, we must have patience to see how the market reacts. That alone will decide the level of probability that Ford stock might rise or fall in the near future.

Looking at the intra-day chart earlier this morning, Ford stock moved violently down, but found price support at the 11.79 low. Question was, would that hold? The day chart here says it did, at least for today. Monday might bring another test.

I will continue to monitor the stock’s price action next week. Nonetheless, I wouldn't be surprised if Ford stock went sideways for awhile until the street absorbs the news and looks at the potential in Ford's future. Unfortunately, the option prices are not favorable to me to selling puts for income while I wait.