Ford's $2.1 Billion Net May Be Hard to Beat as Costs Rise

Ford Motor Co.’s first-quarter profit of $2.1 billion may be as good as it gets this year as the automaker faces rising costs to introduce new models.

Earnings beat analysts’ estimates and spurred Chief Executive Officer Alan Mulally to forecast a “solid” 2010 profit, a year ahead of his previous prediction. Future quarters may not be as strong, Chief Financial Officer Lewis Booth said today.

“It would be unwise to think of $2 billion as a running rate,” Booth told reporters in Dearborn, Michigan. “We’ve got a lot of new product launches so you’ll see some launch expense and we do expect some headwinds from commodities” prices.

The executives cited challenges such as a “fragile” economy after posting a fourth straight quarter of net income, the longest streak since 2005. Booth said the Ford Motor Credit finance unit was unlikely to “keep up the pace” for the rest of the year, and Ford joined the retreat among U.S. stocks.

“The first quarter could turn out to be their best,” said Joe Phillippi, president of AutoTrends Consulting in Short Hills, New Jersey. “The landscape might become more competitive as Toyota fights its way back and GM launches a lot of new products.”

Ford, the second-largest U.S. automaker, benefited from a recovering auto market and higher prices that added $1 billion to pretax operating earnings. Excluding some gains and costs, earnings were 46 cents a share, topping the 31-cent average of 12 estimates compiled by Bloomberg.

Market Share

A 37 percent surge in U.S. deliveries more than doubled the industrywide increase, helping Ford add domestic market share at the fastest pace in 33 years after becoming the only major U.S. automaker to avoid bankruptcy in 2009.

Profit was buoyed by Ford Credit’s $828 million of pretax operating income, after a $36 million year-earlier loss. Ford Credit, which lends to dealers and buyers, will earn about $2 billion on an operating basis in 2010, Ford said. The unit will pay Ford a dividend of $2 billion this year, up from a previous forecast of $1.5 billion, Booth said.

Himanshu Patel, a JPMorgan Chase & Co. analyst in New York, told investors in a note that the unit’s first-quarter gains were driven by rising resale prices and are “unsustainable.” He advises holding Ford shares.

Ford slid 89 cents, or 6.2 percent, to $13.57 at 4 p.m. in New York Stock Exchange composite trading. That was the biggest plunge since May 12, after the shares almost tripled in the 12 months that ended yesterday.

‘Headwinds’ Focus

Booth said the decline might have resulted from investors focusing on “headwinds” and not on advances such as Ford’s revenue gain. Ford dropped Volvo from the first-quarter results after announcing the sale of the unit March 28 to China’s Zhejiang Geely Holding Group for $1.8 billion.

“If you took Volvo out of last year, we had a 30 percent revenue improvement year over year,” Booth said in an interview. “That’s a mammoth improvement.”

First-quarter revenue rose 15 percent to $28.1 billion, Ford said. That compared with the $28 billion average estimate among 7 analysts. Net income was 50 cents a share, exceeding the average estimate of 29 cents from 2 analysts, and compared with a net loss of $1.43 billion, or 60 cents, a year earlier.

Booth said 2010 earnings will exceed the first-quarter total, without giving a figure, and next year would be even better. “If we achieve solid profitability in 2010, we’ll now be looking to do better in 2011,” he said in the interview.

Automotive Cash

Ford reported $25.3 billion in automotive cash on March 31, up from $24.9 billion at the end of 2009, which the automaker restated from $25.5 billion because of an accounting change.

Cash consumption was $100 million during 2010’s first three months, after the company used $3.7 billion a year earlier. Booth said Ford will have positive cash flow for all of 2010.

Some factories will close temporarily in the second half while being converted to build a new version of the Focus compact car, Booth said. Ford’s price gains will “deteriorate” with the debut of the Focus and the Fiesta small cars this year because those models are less expensive, he said.

Hot-rolled steel sheet, the benchmark metal used in autos and appliances, climbed to an average of $650 a ton in March from $500 in December, according to Purchasing magazine.

Borrowing $23 billion in late 2006 gave Ford a cash cushion to withstand losses and develop new models such as the Fiesta. The trade-off was a debt load that Mulally has said puts Ford at a competitive disadvantage with General Motors Co. and Chrysler Group LLC, which had their obligations cut in bankruptcy.

Automotive Debt

Automotive debt was $34.3 billion, up from $33.6 billion at the end of 2009, which was adjusted from $34.3 billion due to an accounting change, Ford said. That doesn’t include a $3 billion payment Ford made on its revolving line of credit on April 6.

Ford said second-quarter production in North America will be 625,000 vehicles, a 5 percent increase from the plan announced March 2. Output will rise 39 percent compared with a year earlier.

Redesigned models such as the Taurus sedan helped boost U.S. market share through March to 17.4 percent from 14.7 percent a year earlier, the biggest jump since 1977, according to the company. Ford has said it is winning Toyota Motor Corp. buyers after global recalls of more than 8 million vehicles, with first-quarter sales driven by the Fusion sedan, F-150 pickup and Focus.

“Lately, the company has been lucky and smart,” Shelly Lombard, a debt analyst at New York-based Gimme Credit LLC, said today in a note to clients. “We expect Ford to keep being smart. However, it may not be as lucky.”

To contact the reporter on this story: Keith Naughton in Southfield, Michigan, at Knaughton3@bloomberg.net

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