In many respects, the auto industry remains in a funk. Industry sales remain well below previous peaks, competition has never been more fierce, and the need to spend heavily to develop future technologies like electric cars are all creating profit headwinds. In that light, Ford Motor’s (NYSE: F) just-announced second quarter pre-tax income of $2.1 billion is quite remarkable. It’s hard to find another company that has made so many smart moves to escape the clutches of creditors and win back the hearts of consumers.

We took a look at Ford back in early June. Shares have risen +15% since then, but the biggest gains lie ahead. That’s because Ford is on the cusp of becoming an earnings powerhouse. And if you have a three-year time horizon for an investment, this is shaping up to be a two-bagger from current levels.

Quarterly Results Set the Bar
A look at last Friday’s quarterly earnings release gives a sense of where Ford is now — and where it’s headed. The auto maker earned $0.68 a share, 70% higher than the consensus estimate. But we’ve seen this before — Ford has blown past estimates for six straight quarters. It’s not because analysts are incapable of extrapolating sales and cost trends to develop accurate forecasts, it’s just that Ford keeps uncovering more ways to exceed the high bar it has already established.

In some quarters, management finds ways to reduce costs even faster than analysts had expected. In other quarters, Ford is able to maintain price increases that exceed even the most bullish forecasts. This time around, Ford surprised the street by positing very impressive profits on its small cars, which historically carry low profit margins. The fact that Ford delivered $2.1 billion in pre-tax profits in the second quarter represents not just an improvement on recent results, but is better than any full-year profit the company has posted in nine of the past 10 years.

At this point, Ford no longer needs to keep delivering unexpectedly good news. It simply needs to maintain its current operational metrics and let the economy do the rest. During the next few years, analysts expect car sales to rebound as unemployment slowly falls and aging cars need to be replaced.

Nearly 17 million cars and trucks were sold annually throughout much of the last decade. That figure stands at around 11 to 12 million today. We may never see industry volumes surge back to that 17 million mark, but if they rose to 14.5 million, or +25% above current levels, then Ford’s profits could make a dramatic upward move. This is a business with very high fixed costs, so each incremental car sold brings plenty of profit to the bottom line. Cars typically carry $2,000 to $3,000 in gross profits, while trucks can generate twice that amount.

It’s worth noting that recent results contain very tepid truck sales, in large part because people working in the construction trade are sitting idle, awaiting an upturn in housing and commercial construction. When construction activity gets back on its feet, so should demand for these high-margin trucks. Ford stands ready for that upturn, having just released a new line of F-Series Super Duty trucks.

Building a head of steam
The fact that Ford was able to post break-even results in 2009 was considered a minor miracle in light of the cross-currents roiling the global economy. As analysts began to look into 2010, few thought the company could earn upwards of a dollar a share. A string of great quarters has put that concern to bed. Look for 2010 EPS forecasts to rise very sharply in coming weeks, from the current $1.35 consensus to past the $1.70 mark. Forecasts for 2011 per share profit could approach $2.25 and in 2012 or 2013, depending on when the unemployment rate drops and auto sales pick up, EPS could approach $3.00.

Action to Take –> Of course, cyclical businesses never garner a high P/E ratio, but isn’t Ford worth more than four times potential 2012 or 2013 profits? A target of six implies +50% upside, but I’m betting investors eventually come to believe that Ford should be worth eight to 10 times that long-term profit view, meaning the stock price could at least double from here.