Ford May Post Largest Annual Profit Since 1998 on One-Time Accounting Gain

Ford Motor Co. (F), boosted by a one- time tax gain, may report its most profitable year since 1998, while weakness in Europe and Asia cut fourth-quarter earnings.

Ford may post 2011 net income tomorrow that tops $20 billion, thanks to a gain of about $14 billion from eliminating a valuation allowance against deferred tax benefits, said Robert Willens, a corporate tax specialist. Ford no longer needs the reserve, created in 2006 as it began reporting operating losses, because it expects to be profitable in coming years and able to use the tax benefits, according to a U.S. filing.

The non-cash gain is likely to push fourth-quarter net income above the record of $1.8 billion set in 1999, Willens said. Ford’s highest annual net income was $22.1 billion in 1998, when it sold the lender Associates. Ford had $6.6 billion in net income in the first nine months of 2011, the most since 1998, on rising sales of new models such as the Explorer.

“Investors need to focus on the statement Ford is making and forget the big accounting journal entry,” said Willens, president of Robert Willens LLC of New York. “This is a statement from Ford that they have a high level of confidence in their ability to generate copious amounts of income for the foreseeable future.”

The annual profit would be the third straight for Chief Executive Officer Alan Mulally, who has improved quality and expanded the model lineup with fuel-efficient offerings like the Fiesta subcompact. Ford lost $30.1 billion from 2006 to 2008, as truck and sport-utility vehicle sales collapsed and the economy fell into the worst recession since the Great Depression.

Europe, Asia Woes

In last year’s fourth quarter, the Dearborn, Michigan-based automaker was hampered by a deteriorating market in Europe and flooding in Thailand that rendered its Asian operations unprofitable, Chief Financial Officer Lewis Booth told analysts Jan. 10. Fourth-quarter profit excluding some items may have slipped to 25 cents a share, from 30 cents a share a year earlier, according to the average estimate of 15 analysts surveyed by Bloomberg.

“The fourth quarter wasn’t an easy quarter for Ford,” said Efraim Levy, an analyst for S&P Capital IQ who has a “buy” rating on Ford. “The euro zone will reflect weakness from late in the quarter and you’ll see more impact in the first quarter. It will get worse before it gets better.”

North America

North America, where Ford generates most of its sales and profits, will remain a stronghold as new models like the redesigned Fusion sedan and Escape SUV arrive this year, said Brian Johnson, an analyst with Barclays Capital. Ford’s U.S. sales rose 11 percent last year and it gained market share for the third consecutive year for the first time since 1970.

North America is shaping up to be even better in 2012,” Johnson, who rates Ford “overweight,” said in an interview. “The Fusion was clearly the mid-sized car hit of the Detroit auto show and the new Escape will be sold at a higher price point.”

Ford’s 2011 revenue may have risen to $134.7 billion, the average of five estimates, from $129 billion in 2010. In the fourth quarter, revenue may have climbed to $33.5 billion, the average of four estimates, from $32.4 billion last year.

Consumers paid an average of $32,028 for the company’s models last year, up 25 percent from 2002 and the highest price Ford vehicles have ever commanded, according to online auto researcher Edmunds.com.

‘More Credible’

“Ford is seen as a more credible competitor to the Japanese brands and they’re gaining a lot of traction in places they weren’t historically strong, like California,” said Jessica Caldwell, director of pricing and industry analysis for Edmunds, which is based in Santa Monica, California.

Ford boosted prices and profits by loading new models with technology like voice-activated phones and fuel-efficient, turbocharged engines. Other competitors, such as South Korea’s Hyundai Motor Co. (005380), are now attempting to match Ford’s technology and pricing strategy, Johnson said.

“Ford’s key challenge in 2012 is maintaining its market share position in the face of all the copycat strategies,” Johnson said.

Enthusiasm for the redesigned Fusion sedan introduced at the Detroit show this month has helped to drive up Ford shares 19 percent this year. Ford fell 36 percent last year after rising 68 percent in 2010. Ford fell 1.1 percent to $12.79 at the close in New York.

“The stock is too cheap for a company that has done everything right,” said Gary Bradshaw, a fund manager at Dallas-based Hodges Capital Management, which owns about 250,000 Ford shares. “If an investor is patient, I think you can make good money on Ford. But it’s been painful, that’s for sure.”

Investor Concerns

While the sluggish recovery has weighed on Ford’s stock, investors also are concerned about the elimination of the valuation allowance raising Ford’s U.S. tax rate to near 35 percent, as the automaker has said it would. Once it releases the valuation allowance, Ford will revise its operating earnings per share for 2011 to reflect the new tax rate, the company said in a filing.

Fears about the higher tax rate are misplaced, Johnson said. Ford won’t actually pay cash taxes this decade because it still has operating loss carryforwards and other tax assets on its books to offset taxes, he said.

“I’ve been fighting a losing battle in trying to get investors to understand,” Johnson said. “The valuation allowance is not a positive because it gets people focused on an artificially high tax rate that leads to an EPS that doesn’t reflect the underlying cash earnings power of the company.”

To contact the reporter on this story: Keith Naughton in Southfield, Michigan, at knaughton3@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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