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If you had invested in Ford (NYSE:F) way back in 2012 when it was around $9 - the lowest level the stock has seen in the last five years - and held it until now, your investment would have returned you a little more than 30%, as the stock is now trading a little lower than $12 at the time of writing the article. But during the 2012-2015 period Ford’s total revenue has increased from $133.55 billion in 2012 to $149.55 billion in 2015, operating margin increased from 4.4% to 5.4% and the company has also turned around its European operations from a loss-making one to a profitable one. Let's take a closer look to know what is the hidden jewel in Ford Motors' crown.

The Past Year As A Snapshot Preview

But none of those internal improvements have mattered to the stock market, and you would have been forced to accept small returns and be happy with the dividends you would have collected in the process. The market’s current pessimism towards auto companies started late last year as U.S auto sales kept hovering around above-average levels. As a cyclical industry, the expectation was that sales had no further room to improve, which meant lower sales in the immediate future. The assumption was that even if sales levels held, auto companies will have to cut off each others arms and margins through discounts as they desperately try to hold on to their respective sales performances.

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Though, fortunately, the market didn't fall off the cliff after hitting the highest point of 18.6 million vehicles in November last year, sales indeed kept moving sideways in a tight range of 17 to 18 million cars a month.

Why U.S. Sales are Key, and the Europe Story

During the third quarter of the current fiscal, Ford’s total revenue was $33.3 billion, out of which $21.8 billion came from the United States. Ford’s total pre-tax profit across all regions was $1.1 billion, with the U.S. alone bringing in $1.3 billion in pre-tax profit. Nearly 66% of their current sales are from the domestic market and, on the pre-tax profit front, without US market, Ford would have operated at a loss.

Ford’s pre-tax profit column was negative in South America and Middle East and Africa, while Europe and Asia-Pacific were just over $100 million each during the third quarter. This dependency on the United States is what is weighing down on Ford, and it is not something that the company can wriggle out of as quick as we want it to.

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Europe has the potential to bring in some cover for the United States. The second largest market for Ford had $6.3 billion in sales, accounting for nearly 19% of their sales during the third quarter. Operating margin came in at 2.2%, a far cry from the above 10% level Ford U.S hit during 2015 and the above 5% level the company reached in the United States during Q3 2016. Things have improved a lot for Ford in Europe, and third quarter 2016 was the sixth consecutive profitable quarter for the company.

Though Brexit could throw a huge spanner in Ford’s recovery in Europe, the continent remains the single biggest hope for the company because there is plenty of room to improve their bottom line. Even doubling their margin levels while holding on to the current market share position in Europe would provide a huge booster shot for the company’s earnings column.

According to Ford’s 2020 Vision, the company wants to hit an operating margin of 8% with a long term target of 8% to 9%. With more than 85% of their sales coming from two continents, unless Ford stays at or above 8% in the United States and Europe, the company won't be able to reach those levels.

Stability Supports Ford Europe’s Emergence

The U.S. economy is doing well and the global economy is doing reasonably well, so the odds of a recession are still low. And the best part is, Ford seems to be in much better shape to handle a slowdown now compared to the position it was in ten years ago. The stock remains at depressed levels as things will continue to stay tight in its largest market. Sales are moving sideways and gradually lower, causing a margin contraction, and it will remain so in the short to medium term. We might see some good quarters and some bad quarters, but the stock will inevitably end up staying on its current course.

If the company can improve Europe's operating numbers then the stock will definitely move to a higher level but that process will take time, possibly another year or two at least. Until then, all investors can do is enjoy the above 5% bond-like yield on the stock. This is a buy and hold the stock that should ideally remain in your portfolio for a very long time, and the yield should make it worth your while until we see some dramatic improvements in Ford Europe.