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Ford’s Profit Explosion

By Briton Ryle

As of Monday, you could place your order with a Ford dealer for a brand new 2015 F-150. The F-150 is the best-selling truck in history, and it has been the best-selling line of vehicles for 32 straight years. Ford sold 763,402 of them in 2013.

So it’s no surprise that people will want to pre-order the newest F-150. But this particular truck is special: it will have an all-aluminum body.

Ford’s move to craft the popular truck out of aluminum is revolutionary. It will lower the total vehicle weight by 700 pounds, or around 15%, meaning the truck can be more powerful with a smaller engine and get better gas mileage at the same time.

It’s being reported that some F-150s will approach 30 mpg on the highway. And if you want to forgo the improved gas mileage, the towing capacity will be much higher.

Aluminum is both stronger and more pliable than steel, and it doesn’t rust. So these new trucks will stay looking good for a long time.

Perhaps best of all for Ford (and its shareholders) is the fact that the price is going to increase heavily for the top-line trucks. The King Ranch model will cost $3,615 more, and the Platinum package will be $3,055 more expensive.

The baseline truck will only be $395 more over the 2014 vehicle, but all 2015 F-150s will have a new $1,195 shipping and destination fee tacked on.

The F-150 is already the most profitable vehicle Ford makes. It accounts for about half of Ford’s North American profits, and one analyst estimates Ford earns $11,000 for every truck sold compared to $5,000 for each car.

But don’t get upset at Ford for gouging new buyers with higher prices and shipping fees. And don’t assume new truck buyers will lose their enthusiasm for the F-150 and start buying Chevys, either. The fact is aluminum is more expensive than steel.

Consulting firm Ducker Worldwide found it costs between $1.50 and $2 to cut one pound of weight from a vehicle by using aluminum instead of steel. So the new F-150s likely cost around $1,500 more to build.

Plus, Ford has to retool two factories to make the new trucks, requiring them to shut the plants for 13 weeks. That’s going to cost them 90,000 trucks on top of the retooling costs.

But Ford says this is restoring its price advantage over competitors’ trucks to the historical range of $3,000 to $4,000 from ~$1,000, where it sits today.

Ford has an opportunity to make much more money starting in 2015.

Ford reported earnings for the second quarter of 2014 last week. Things looked very good. The company reported $0.40 a share when analysts were looking for $0.36 a share.

Ford has beaten earnings estimates handily in three of the last four quarters, and it has $3.9 billion in pretax profit so far this year.

One aspect in particular of that Q2 earnings report that many investors might gloss over has very positive implications going forward: Ford made $14 million in Europe.

Now, when you compare that to North American profits of $2.4 billion, it’s not so great. But Ford hasn’t made money in Europe since 2011, when the economy there fell apart.

In fact, Ford has lost $3.5 billion in Europe since the start of 2012. That works out to $0.40 of net income per share, or nearly 23% of 2014 profits.

Of course, the company took steps to stop losing money there… and they’re finally working. So if Ford can get European profits looking better, there is even more upside waiting in 2015.

Ford is expected to earn $1.33 a share this year. That’s good, especially when you consider the retooling costs for the aluminum F-150s and the fact that Ford will still lose well over $1 billion in Europe for the full year.

But in 2015, earnings estimates jump to $1.92 a share — a whopping 45% improvement. Frankly, I think that’s way too low.

Second quarter profits were up 22% in Asia. Ford sold 549,256 vehicles in China in the first half of 2014, a year-over-year gain of 35%. And with new models coming to China in 2015, those numbers will be even better.

The thing is, Ford shares are cheap. Right now, they trade with a 2014 price-to-earnings (P/E) ratio of ~13. But based on 2015 earnings estimates, they’re trading with a P/E of just 9. And Ford is still a ways off from its peak sales.

Next year, we could see Ford push well over $20 a share.

I first recommend Ford to my Wealth Advisory subscribers in May of 2013 at $15 a share. Add in the dividends, and we’re up around 21%.

But I think the best is yet to come. Ford will make $7 to $8 billion in profits this year, and that number will be closer to $10 billion next year. No doubt that will lead to a bigger dividend payment, too.

This time next year, Ford could easily be a $25 stock.