Ford Motor Falls on Outlook for Increased Pressure for Prices of Vehicles

Ford Motor Co. (F), the second-largest U.S. automaker, fell in New York trading after saying it may benefit less from higher vehicle prices and face higher costs in the second half.

Automakers may spend more on incentives as they boost inventories that were depleted by the March tsunami in Japan, Ford Chief Financial Officer Lewis Booth said today. Higher prices for models such as the Fiesta subcompact boosted revenue by $1.1 billion in the second quarter.

Higher prices may not be sustainable “at quite the same level as the first half,” Booth said in a phone interview. Costs for commodities such as steel, plastics, copper and aluminum “stay under pressure” and contribute to about half of the $4 billion in higher costs that Ford sees this year.

Ford fell 23 cents to $12.94 at 4 p.m. in New York Stock Exchange composite trading. The shares have declined 23 percent this year after a 68 percent gain in 2010.

Net income in the second quarter fell to $2.4 billion from $2.6 billion a year earlier, Dearborn, Michigan-based Ford said today in a statement. Excluding some items, profit was 65 cents a share, beating the 61-cent average of 14 estimates compiled by Bloomberg.

The results precede negotiations that begin this week between Ford and the United Auto Workers. Chief Executive Officer Alan Mulally said today that talks will focus on efforts “to improve every element of competitiveness.”

Photographer: Brent Lewin/Bloomberg

Ford CEO Alan Mulally, 65, is betting U.S. consumers will switch from larger vehicles to more fuel-efficient cars such as the Fiesta and pay more for amenities such as heated leather seats as gasoline prices rise. Close

Ford CEO Alan Mulally, 65, is betting U.S. consumers will switch from larger vehicles... Read More

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Photographer: Brent Lewin/Bloomberg

Ford CEO Alan Mulally, 65, is betting U.S. consumers will switch from larger vehicles to more fuel-efficient cars such as the Fiesta and pay more for amenities such as heated leather seats as gasoline prices rise.

Labor Costs

Ford has estimated it faces an $8 an hour gap in labor costs compared with the mostly non-union factories of foreign automakers and rival Chrysler Group LLC, which began UAW talks yesterday.

The negotiations for a new contract are an “important consideration” among ratings companies as they consider boosting Ford to investment grade, Robert Schulz, a New York- based credit analyst at Standard & Poor’s, wrote today in a report.

“Ford’s financial performance is tracking levels consistent with a higher rating,” he said, citing cash generation from automotive operations that may exceed $4 billion this year. Ford lost its investment-grade ratings in 2005.

Pretax profit in Ford’s European operations plunged 45 percent to $176 million. While the results compared unfavorably to a year earlier when the company was rebuilding inventories after government programs to scrap older vehicles, the figures were “well in-line with our planning,” Booth said.

Sales Slow

Industrywide U.S. light-vehicle sales slowed to a seasonally adjusted annual rate of 12.1 million in the quarter from 13.1 million in the prior three months, according to Autodata Corp. Ford said the March tsunami in Japan wiped out 2.5 million units of global industry output in the quarter.

Ford’s U.S. deliveries rose 9 percent to 1.07 million in the first half, trailing the industry’s 13 percent gain. The 9 percent figure includes year-ago sales of Volvo vehicles.

“We’re looking at it being a rough ride for the rest of this year not just for Ford, but for the industry as a whole,” Stephen Spivey, an analyst at Frost & Sullivan Inc. in San Antonio, said in a phone interview.

Ford raised prices three times this year and lowered discounts more than the industry average in their home market during the first half, according to Woodcliff Lake, New Jersey- based Autodata.

Mulally, 65, is betting U.S. consumers will switch from larger vehicles to more fuel-efficient cars such as the Fiesta as gasoline prices rise and pay more for amenities such as heated leather seats. Regular unleaded gas has exceeded $3.50 a gallon in the U.S. since March, according to AAA.

Higher Costs

The cost of developing new models and improving the Ford and Lincoln brand images will add $2 billion to the company’s structural costs this year. Ford also reiterated its forecast for commodity costs to rise by another $2 billion.

The forecast for $4 billion in higher costs “increasingly looks only modestly conservative” rather than “excessively conservative as we had hoped,” JPMorgan Chase & Co. analyst Himanshu Patel said today in a research note. He rates Ford “neutral” with a $19 price target.

“There are various kinds of initial hits to the bottom line as you’re bringing out new product, but if it’s done right you make that up on the back end,” Stephen Brown, a Chicago- based analyst at Fitch Ratings, said in a phone interview before results were released.

Ford’s second-quarter sales climbed 1.4 percent to $35.5 billion. The improvement even after last year’s sale of Volvo Cars topped nine analysts’ average estimate for $32.1 billion.

Production Boosted

The automaker boosted North American production for the quarter by 8.7 percent percent to 710,000 cars and trucks, in line with its forecast on April 26. Pretax profit for the region rose less that 1 percent percent to $1.91 billion.

Ford forecast a 7.5 percent increase to third-quarter production to 630,000 units in North America, according to today’s statement. Worldwide output will rise 7.3 percent to 1.35 million.

Ford maintained its forecast for full-year industrywide U.S. sales of 13 million to 13.5 million vehicles, including medium-and heavy-duty trucks.

“We probably feel closer to the bottom end of that, but we’re still expecting to see some recovery in the second half as availability of product from all manufacturers becomes better,” Booth told reporters today in Dearborn.

Longer Contraction

The “snap back” that Ford has said it expects in the U.S. auto market during the second half “seems improbable at this point,” said Spivey, the Frost & Sullivan analyst.

“Built into these forecasts is some sense of economic recovery that doesn’t seem to be taking place,” he said. “The industry contraction may be here a bit longer than expected.”

Profit in Ford’s credit operations will fall by about $1.1 billion this year because of changes in lease depreciation and credit-loss reserves, the company said, repeating a previous forecast. Ford reiterated its estimate that the unit will distribute about $3 billion to the parent company this year.

Ford Motor Credit distributed $1 billion to the parent company in the second quarter, bringing first-half contributions to $1.9 billion.

Ford’s $1.79 billion of 7.45 percent notes due in July 2031 rose 0.125 cent to 114.125 cents on the dollar today in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Credit Rating

“We try to rate through the cycle,” said Brown, the Fitch analyst. “We want to make sure the fundamentals underlying the business are such that this company could retain an investment- grade status even at the bottom end of the cycle. That’s realistic to get there, but requires some additional work.”

Ford’s automotive operations had $22 billion in cash on June 30, up from $21.3 billion on March 31. The company cut automotive debt to $14 billion on June 30, from $16.6 billion on March 31. Ford targets $10 billion of debt by “mid-decade.”

“I suspect they want to see a little bit more clarity on the economy and perhaps to see us get through the UAW discussions and maintain our competitiveness,” Booth said of credit-rating agencies. “The performance we’re delivering is getting us toward investment grade sooner rather than later.”

While Ford reduced debt by $14.5 billion last year, the company has more than rivals because it borrowed $23 billion in late 2006 before credit markets froze. That helped Ford avoid the bailouts and bankruptcies that befell the predecessors of General Motors Co. (GM) and Chrysler in 2009.

To contact the reporter on this story: Craig Trudell in Dearborn, Michigan, at ctrudell1@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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