Ford Falls Most in 7 Months on Worsening European Outlook

A widening loss in Europe sent Ford Motor Co. (F) shares plunging the most in seven months, stealing the market’s attention from fourth-quarter earnings that beat estimates.

Shares for the second-largest U.S. automaker fell 4.6 percent to $13.14 yesterday, the biggest one-day drop since June 29 and wiped out most of their gains this year.

Ford surprised investors by increasing its estimate on European losses to about $2 billion this year, from a previous forecast of a loss exceeding $1.5 billion. Chief Financial Officer Bob Shanks said in an interview that he was equally surprised by yesterday’s selloff. The new loss estimate was “not really a material change” from the $1.75 billion Ford lost in Europe last year, he said.

“I’m a little disappointed,” he said in an interview. “I expected there to be kind of raised eyebrows around a slightly larger loss, but it’s a couple hundred million dollars on a business that’s still going to make about the same amount of money it made this year, which is $8 billion and with a revenue of $135 billion or so. I would have thought that would have been taken a bit more in stride.” Shanks referred to Ford’s 2012 pretax profit of $8 billion on revenue of $134.3 billion.

Yesterday’s slide occurred while fourth-quarter sales and profit exceeded estimates. Excluding one-time items, the per- share profit was 31 cents, exceeding the 25-cent average estimate of 19 analysts surveyed by Bloomberg. Automotive revenue totaled $34.5 billion, beating the $33 billion average estimate of 11 analysts. Total fourth-quarter revenue rose 5.5 percent to $36.5 billion.

‘Soft’ Forecast

Investors see the company’s forecast for this year as “soft,” Brian Johnson, an analyst at Barclays Plc, wrote yesterday in a report. In addition to the growing losses in Europe, Ford forecast auto margins to be the same or lower than last year, even as profit and market share grow in North America, while Asia and South America break even.

“Ford is forecasting no margin expansion” in North America “and steeper losses in Europe along with the rest of international only break-even,” wrote Johnson, who rates Ford the equivalent of a hold. “This undercuts the popular investor thesis that Ford offers significant earnings expansion from a booming U.S. auto market while having ‘Europe-proofed’ its guidance.”

Analysts expressed skepticism about Ford’s forecast after a year in which it achieved a record 10.4 percent operating margin in its North American operations on strong sales of its F-Series pickups.

No Lowballing

“We believe there is an element of conservatism baked into Ford’s soft 2013 guidance,” Ryan Brinkman, an analyst with JPMorgan Chase & Co., wrote in a note to investors. “Ford is likely being particularly conservative as relates to 2013 North American margin guidance, whereas the outlook for higher losses in Europe is more likely truly reflective of deteriorating industry conditions.”

Shanks said Ford isn’t lowballing in its forecasts in hopes of a big beat later.

“I’ve seen those comments about potentially conservative guidance,” Shanks said in the telephone interview. “I have to tell you I’m staring at our real numbers. It’s 50-50. It really is. We don’t try to figure out a way to provide guidance that gives us an opportunity to beat.”

Ford lost $732 million in Europe in the fourth quarter and sees the region hitting bottom this year, Shanks said.

“We’re seeing weakness in the industry; certainly it will be lower than last year,” Shanks said earlier, during a briefing at Ford’s headquarters in Dearborn, Michigan. “It’s just a very tough economic environment in Europe. We have a lot of difficult times in front of us.”

CEO’s Strategy

Ford reported net income of $1.6 billion, or 40 cents a share. The result compared with net income of $13.6 billion, or $3.40 a share, a year earlier, when a tax gain boosted fourth- quarter earnings.

Chief Executive Officer Alan Mulally is using Ford’s turnaround in the U.S. to guide efforts to recover in Europe more quickly than competitors including General Motors Co. (GM) Rising demand for F-Series trucks in Ford’s home market paced a record $8.34 billion annual pretax profit for the company’s operations in North America, which countered overseas losses. The region had a fourth-quarter pretax profit of $1.87 billion.

“Europe is a mess,” Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan, said yesterday in a telephone interview. “It’s going to be tough for anyone to make any money in Europe for the foreseeable future until the economies turn around.”

Ford’s Streak

Ford reported net income of $5.67 billion for the full year. The profit in 2012 boosts the company’s earnings to $35.2 billion the past four years after losing $30.1 billion from 2006 through 2008.

Mulally, 67, revived Ford after arriving in 2006 from Boeing Co. (BA) by using $23.4 billion that the company borrowed late that year to overhaul its lineup with fuel-efficient models such as the Focus and Fiesta. Those efforts were preceded by plans to restructure the company’s North American operations beginning in October 2005.

Ford faces about $500 million in restructuring costs related to Europe in 2013, Shanks told reporters yesterday. The company incurred about $70 million in restructuring costs in 2012, all of which came in the fourth quarter.

“I would hope eventually that we can have people see this as an investment.” Shanks said in the interview. “Even though it’s a cost, if you will, it’s an investment. We’re willing to take those hits up front, particularly while the market’s weak. Because when it comes back, we’d like to be as well positioned as possible to take advantage of that.”

UAW Bonuses

Ford’s operating profit in North America topped the company’s previous annual record of $6.2 billion in 2011. The region’s operating margin of 10.4 percent for the full year also surpassed 2010’s record of 8.4 percent.

The North American results will mean profit sharing of about $8,300 on average to its 45,300 hourly workers represented by the United Auto Workers, a record payout that will occur in March, according to a company statement. Ford paid an average of $6,200 to each of its UAW-represented workers for 2011.

Ford also plans to contribute more this year to its pension plans, which finished last year with an $18.7 billion shortfall from $15.4 billion a year earlier. Ford plans to contribute about $5 billion to pension plans in 2013, up from $3.4 billion last year.

F-Series Demand

Increased demand for Ford’s F-Series, which has led the full-size pickup segment in the U.S. for 36 years, is pacing the company’s results at home. F-Series deliveries climbed 10 percent last year to 645,316, surpassing the 4.7 percent gain in Ford’s total U.S. vehicle sales.

The F-Series accounts for 90 percent of Ford’s global auto profits, according to a Morgan Stanley estimate, and is helping underwrite the company’s European restructuring. Ford plans to shutter three factories in Europe by the end of next year and cut 6,200 jobs, or 13 percent of its workforce there, in an effort to break even in the region by mid-decade.

“These things don’t happen in three months, six months or even a year, but we will get there,” Shanks said of Ford’s European restructuring during a conference call. “Now by mid- decade, are we going to be getting an 8 or 9 percent margin in Europe? No, we think a 6 to 8 percent margin is further out. But we do think we’ll be above the zero line and starting to generate some profit.”

Ford’s board signaled support for the company’s European restructuring plan by doubling the quarterly dividend earlier this month. The first-quarter dividend of 10 cents per share will be payable March 1 to shareholders as of today.

European Ills

Demand in Europe fell 7.8 percent to 12.5 million vehicle registrations, the lowest in 19 years, according to the European Automobile Manufacturers’ Association, or ACEA. Ford’s registrations plunged 13 percent to 939,409, the Brussels-based trade group said earlier this month.

Automakers have announced 30,000 job cuts in Europe since July. GM, which along with Ford sees Germany at risk of slipping into recession, said last week that its Opel brand may shutter a factory in that country two years earlier than planned as the European auto market sinks for a sixth straight year. The factory employs 3,100 workers.

Job Cuts

Renault SA (RNO), the automaker whose sales in Europe dropped the most in 2012, announced plans this month to cut 7,500 positions, or 17 percent of its French workforce, in the next four years to reduce costs. PSA Peugeot Citroen (UG) yesterday was ordered by a French court to pause its restructuring plans as workers in the country went on strike to protest job losses. Prior to yesterday’s order, Europe’s second-largest carmaker planned to extend reductions in France to 11,200 posts.

Ford is still planning new products for Europe, including the addition of the Mustang sports car and two sport-utility vehicle offerings. The automaker is adding the subcompact EcoSport SUV, just four meters (13 feet, 1 inch) long, and the Edge midsized utility to its European lineup, which already includes the Kuga compact, known in the U.S. as the Escape.

“The No. 1 thing is to continue to invest not only in the product but also in the brand while we work the cost side, just like we did in the U.S.,” Mulally said of Europe on the conference call with analysts and reporters.

To contact the reporters on this story: Craig Trudell in Southfield, Michigan, at ctrudell1@bloomberg.net; Keith Naughton in Southfield, Michigan, at knaughton3@bloomberg.net

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

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