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What: Ford Motor Company stock is trading more than 5% lower early Wednesday after the company announced its outlook for 2014 would bring in lower operating margin, operating related cash flow, and will equate to lower pre-tax profits than previously guided.
So what: This is a typical theme with Ford. The market tends to overreact to bad news, sending the stock lower while reacting very little during very positive news. The main issue here is understanding why operating margin and pre-tax profits are expected to be lower next year. There are two issues here to consider.
One is the fact that 2013 has been incredibly solid and profitable for the automaker -- in fact, it's expected to be one of the best years in Ford's history. Ford estimates that its pre-tax profit for 2013 will come in at roughly $8.5 billion; its forecast for next year, albeit slightly lower, is still a respectable range of $7 billion-$8 billion
Second is the fact that Ford is undertaking the most aggressive product launch schedule in its entire history next year. It plans to roll out 23 all-new or significantly refreshed vehicles globally, which is a drastic increase from this year's 11 global vehicle launches. Costs associated with converting plants to produce different designs, advertising campaigns, and a multitude of other factors will no doubt put pressure on margins and profits. But in reality, for long-term investors, this is a move that will improve profitability down the road.
"This is our most ambitious launch plan ever, as we continue to implement our One Ford plan," said Bob Shanks, Ford executive vice president and chief financial officer, in a press release. "In 2014, we are investing across the world to support next year's launches, but also to drive profitable growth beyond 2014 as we serve more customers in more markets and in more segments."
Now what: Take a step back, Ford investors, and relax. Move your mouse away from the sell button if you're having a knee-jerk reaction to slightly lower profitability next year as the company gears up for what should be a great remainder of the decade.
Consider that the outlook for Ford's most profitable and highest sales volume vehicle, the F-Series, is very strong next year. Sales are up nearly 20% this year even with it being the oldest design among competing full-size trucks. That all changes in 2014 when Ford launches its next-generation F-150, and expect sales to surge in the back end of the year and help sustain profitability. Improving housing construction and the continued energy boom, in addition to the average age of vehicles being at a record high, will provide plenty of demand for the Blue Oval's most profitable product.
Ford's main profit driving region, North America, is gearing up for another solid year in 2014, and that will sustain plenty of demand for Ford's entire lineup. That will ensure Ford's factories are running at high capacity and not damaging margins drastically. This is not profits dropping off a cliff, it's a small bump in the road. In addition to the U.S., Ford's full-year automotive revenue is projected to grow roughly 10% with market share gains in all regions other than Europe. In other words, business is still good!
Also consider that Ford has taken huge steps to shore up its balance sheet, doubled its dividend, and cut the underfunded status of global pension plans nearly in half! Ultimately, if you're a long-term investor you must realize that nothing in Ford's business has changed for the worse, it's only a hiccup as the company balloons new vehicle launches to continue aggressive growth globally -- and that, as always, comes at a cost. The cost for a more profitable future is a slight dip in 2014 pre-tax earnings.
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The article Why Ford Motor Company Stock Is Getting Destroyed and Should You Care? originally appeared on Fool.com.Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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