* CFO: Higher vehicle launch costs, Europe weighed on Q4
* Commodity costs cut into 2010, will rise in 2011
* Ford reduced debt by $14.5 bln in 2010
* Shares close down more than 13 percent (Adds context on share price, trading volume, operating margin)
By Bernie Woodall
DETROIT, Jan 28 Ford Motor Co's (F.N) earnings fell far short of expectations on surging costs for new vehicle launches and an unexpected loss in its European business, driving its shares down more than 13 percent.
The disappointing results, which also reflected higher commodity costs, shook confidence in the next stage of recovery for Ford after a four-year comeback that has seen the No. 2 U.S. carmaker climb back from a brush with near-bankruptcy.
Ford shares had been one of the best-performing American stocks since late 2008, rising from just above $1 to nearly $19 earlier this month.
The fourth-quarter results marked the first time Ford fell short of Wall Street profit forecasts in two years.
"Anything that comes out that's a tad disappointing, even if it's a tad disappointing inside a great story, is going to be punished," said Bernie McGinn, chief investment officer at McGinn Investment Management, who owns Ford shares.
Ford shares closed down 13 percent at $16.27 n the New York Stock Exchange, where it was the second-most active stock, behind Citigroup.
The decline was the biggest, single-day percentage drop for Ford since May 2009, when investors reacted with alarm to Ford's plan to dilute its outstanding shares by 13 percent with new stock issued to fund retiree healthcare. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Reuters Breakingviews [ID:nLDE70R232] Graphic of quarterly earnings r.reuters.com/puh77r Reuters Insider show link.reuters.com/maj77r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
Excluding one-time items, Ford posted an operating profit of 30 cents per share for the quarter, well below the 48 cents per share analysts forecast. Net income dropped almost 80 percent from a year earlier to $190 million for the quarter.
Costs shot higher by over $1 billion compared with the third-quarter, equivalent to a hit of about $860 for every car and truck Ford sold in the period.
Morgan Stanley analyst Adam Jonas said the fourth-quarter results provided "no new reason to buy the stock" and could have "negative stock repercussions" for General Motors Co (GM.N) and other auto companies.
GM shares fell more than 5 percent by the close, the biggest drop for Ford's larger rival since its mid-November IPO.
'PRETTY UGLY, ACTUALLY'
"Ford results were pretty ugly, actually, and the company has been adopted by momentum players," said James Daily, portfolio manager of Team Asset Strategy Fund in Harrisburg, Pennsylvania. "When that happens, you need to have the company beat in the quarter and raise its outlook in order to keep moving higher."
Ford Chief Financial Officer Lewis Booth said analysts underestimated the additional cost of launching new vehicles such as the Explorer SUV and new F-Series trucks.
Another negative surprise was the performance of Ford's European operations, which the automaker had projected would be profitable. Instead, Europe posted an operating loss of $51 million.
At the same time, Ford's market share in Europe dropped to just below 8 percent from nearly 9 percent. Executives said Ford chose to sacrifice market share rather than match competitors by offering deeper discounts in a slack market.
Booth said the rise in Ford's global commodity costs in 2011 would be more than the $1 billion increase the automaker saw in 2010.
Morningstar analyst David Whiston said rising commodity prices could be a problem for Ford, despite its stronger position in the market.
"They've got so many good things going for them in the way of product and pricing power," Whiston said. "The flip side to that is the cost structure. Commodities are not something you can control a whole lot. That's the troubling part of it."
FORD MOTOR CREDIT: A SLOWING ENGINE
Ford also said its finance arm, Ford Motor Credit, would be less profitable in 2011, in part because it had gains in 2010 related to lower lease-related costs and lower loan loss reserves that will not carry over.
Ford Credit, which provides loans to consumers and to dealers for financing inventories, contributed $2.5 billion to its parent last year. In 2011 that contribution will be about $2 billion, the company said.
On a conference call with analysts, Ford Chief Executive Alan Mulally was pressed to comment on whether the company allowed Wall Street estimates to creep up to unrealistic levels as it closed the books on a second consecutive year of rising market share in the United States.
"We are going to work even closer to make sure that everybody understands where we are and where we are going," said Mulally.
Ford's results marked the sixth straight quarterly profit for the automaker and sixth consecutive time Wall Street missed calling the operating results by a wide margin.
For the first five quarters of that streak, analysts on average underestimated actual earnings. For the third quarter, Ford's earnings per share topped estimates by 26 percent, the narrowest beat of its comeback streak.
Booth and Mulally both stressed Ford's 2011 operating margins would be as good as 2010's 6.1 percent or better.
Booth also said the steps Ford took to pay down debt in 2010 moved the company toward its goal of returning to an investment grade rating. Ford reduced debt by $14.5 billion during the year, cutting its annual interest costs by over $1 billion.
Moody's changed its outlook on Ford on Friday to "positive" from "stable" and said it could upgrade the automaker's credit rating -- now two notches below investment grade -- over the next 12 to 18 months.
Ford last had an investment grade rating in 2005, a year before it mortgaged most of its assets to borrow $23.5 billion. That allowed the company to finance new product development while avoiding the bailouts taken by its rivals GM and Chrysler.
For 2010, Ford posted net income of $6.6 billion, its biggest net profit since 1999.
As a result, Ford said it would pay profit-sharing bonuses averaging $5,000 to about 40,600 factory workers represented by the United Auto Workers union. (Additional reporting by Kevin Krolicki and Deepa Seetharaman in Detroit and Ryan Vlastelica in New York; editing by Derek Caney, Phil Berlowitz and Andre Grenon)