Throughout the past few years, I’ve been focusing on the remarkable turnaround at Ford Motor Co. (NYSE: F). Management’s rejuvenation efforts will be talked about in business schools for decades to come. Yet, as shares marched from below $2 in early 2009 all the way up to $19 this past fall, my attention started to drift away. With so many analysts now singing the company’s praises, this was no longer an underappreciated story. I vowed to check back in if the stock ever came back down.

That time has come. After a 25% pullback in just two months, I think shares are once again quite appealing. Don’t look for another 1,000% move in the stock. But how about a 100% move?

An end to the good news
The Ford story was almost too good to be true. The company blew past estimates for seven straight quarters, as sales continually came in above plan while expense growth remained muted. That all came to an end in the fourth quarter of 2010, as Ford missed the consensus profit view by nearly 40%. About half the shortfall came from one-time costs associated with the launch of new products and engines, but one fact became clear: the era of Ford’s upside surprises has ended — for now.

Shares fell 13% on the day those weak results came out and they’ve been falling ever since, as rising oil prices raise the notion that highly-profitable truck sales will take a deep hit. Counter-intuitively, that’s precisely the kind of bad news you should be looking for. That’s because rising oil prices are a reflection of short-term global tensions. Once those tensions cool, oil prices are expected to march back below the $100 per barrel mark. When that happens, investors will again focus on the broader picture for the auto industry.

 
Rising sales
Ford’s total debt dropped from $34 billion at the end of 2009 to $19 billion at the end of 2010. Now, management is set to pump up cash balances as debt levels have moved back into a more manageable range. Citigroup analysts predict that Ford’s considerable cash flow will help boost the company’s cash levels from a current $20 billion to $40 billion by the end of 2013. Yet, even as Ford has become quite healthy, the auto industry is still in a funk. Total industry sales remain well below historically typical levels, but as they continue to rebound, look for Ford’s income statement to really shine.

In the middle of the past decade, sales of cars and trucks were typically about 17 million in North America. That figure fell below 11 million in 2009 before rebounding to about 12 million in 2010. Analysts at Citigroup predict that figure will rise to 14.6 million by 2012. Goldman Sachs thinks that figure will hit 15.5 million by 2013.

The key takeaway here is that making cars and trucks entail very high fixed costs and the incremental profit made on each car can really fatten the bottom line. Ford has so aggressively cut costs that it has been able to be quite profitable while industry sales are weak: Earnings per share (EPS) could come in around $1.75 to $2 this year, compared with $1.94 in 2010 (don’t forget: Ford eked out $0.09 in 2009 and lost $3.13 in 2008). That level of profit comes as Ford’s factories are expected to be operating at 77% of capacity in 2011. Rising industry sales could push that figure to 85% by 2013, according to Goldman Sachs. That 8% percentage-point change will help boost profits at a far faster clip.

By my math, EPS are likely to exceed $2.50 by 2013 and approach $3 by 2014. Few are talking about such profit levels right now, especially as rising oil prices threaten to dampen truck and SUV sales. Indeed that’s the biggest risk for Ford’s shares. Yet, as I noted earlier, the recent spike in oil prices doesn’t seem to be the result of global shortages, and they are likely to cool off after tensions in the Middle East and North Africa subside.

Action to Take –> We’re not out of the woods just yet in terms of this oil scare. Some think that NATO intervention in Libya would cause prices to spike yet higher (while others think such a move would dampen the speculative frenzy in oil pits, as the endgame would be in sight). Yet, as we’ve seen on Tuesday, March 8, some buyers aren’t waiting for the oil price pullback, and Ford’s shares are up 2%. I’d suggest buying in when shares hit $14.50 (up from a current $14.30) to be sure the recent wave of selling has been flushed out. If shares do indeed fall lower, below $14, keep your buy price $0.50 above whatever lows the stock hits on an intra-day basis.

In the next few years, shares could trade up to eight or nine times that $3 EPS target, or $24 to $27. That’s almost a 100% potential gain from current levels. The path ahead may not be as smooth as Ford’s steady upward ascent in 2009 and 2010, but this Detroit icon’s turnaround is still unfolding.

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