Finally, Good News for Ford

The automaker posts a rare profit for the second quarter, but the outlook for the rest of the year is less upbeat

Ford Motor (F) handily beat Wall Street estimates by posting a $750 million profit for the second quarter, the first profitable quarter for the struggling automaker in two years.

While Ford Chief Executive Alan Mulally, in the hot seat for less than a year, was enthusiastic about the company's progress, he was far from giddy. That's because the third and fourth quarters are expected to deliver losses, giving Ford another annual loss. "There's a lot left to do," said Mulally.

Ford is trying to bounce back from an historic loss of $12.6 billion last year. Rumors have been rampant that unless the automaker gets a dramatic—some have called it "transformational"—agreement with the United Auto Workers union in the current negotiations, Ford could be a candidate for bankruptcy.

Analysts Were Surprised

That, however, seems a stretch for now. Ford has more than $35 billion in cash and credit lines. It is burning cash as it copes with a falling market share. But Mulally said July 26 that the previous estimate that Ford would burn through $17 billion in cash by 2009 has been revised to $15 billion to $16 billion.

Ford said its automotive sector made $378 million for the quarter, compared with a pretax loss of $716 million for the second quarter of last year. Although its core North American operations showed improvement, they still posted a pretax loss of $279 million, vs. a pretax loss of $789 million a year earlier. The positive earnings—31¢ per share—surprised 15 analysts polled by Thomson Financial (TOC) who expected the company to lose 35¢ per share excluding special items.

The CEO, who came to Ford from Boeing (BA) last September, said while Ford's North American business is still running in the red, several pieces of Ford's plan to achieve profitability by 2009 are on track or ahead of schedule. Ford cut $1.1 billion in costs in the first half of the year, on its way to more than $5 billion by 2009. It reduced its sales to rental fleets, which are unprofitable sales. A year ago, 6.1 points of Ford's then 16.1% market share was to fleet. In the most recent quarter, 5.4 points of Ford's total 15.6 market share was fleet. Meantime, its retail share also dropped from 10.6% to 10.2% year over year.

Weak Dollar Helping Luxury Unit

Ford has been reducing head count and manufacturing capacity in an attempt to shrink the company's overhead to the point where it can make a profit at a total market share of 14% to 15%. In the last year, Ford has eliminated 12,000 salaried workers and 13,000 hourly workers. And it's in process of closing nine plants that assemble cars and manufacture engines and other vehicle systems. By the end of next year, Ford aims to have 26% less manufacturing capacity than it did in 2005.

One of Ford's, and now Mulally's, biggest headaches has been Ford's Premier Automotive Group (PAG), which today comprises Volvo, Jaguar, and Land Rover. Aston Martin was part of the unit until Ford sold it earlier this year. In the quarter, PAG swung from a $162 million loss last year to a $140 million gain. And Ford expects the luxury unit to post an overall gain for the year. A big chunk of the improvement, though, is the higher prices those foreign-made brands are getting at retail because of a weak dollar.

It's a fragile recovery for PAG, which is why Mulally on July 26 reiterated his intention to sell Jaguar and Land Rover, and why he is seeking a sale of Volvo. Ford has been talking to potential buyers for the British brands, including Cerberus Capital Management, which recently bought 80% of Chrysler, as well as Indian carmaker Tata Motors (TTM). Mulally said the likelihood of getting a deal done for the British brands is "greater than 50%."

Not Out of the Woods Yet

The CEO's move to seek a sale of Volvo caught some by surprise because Ford's only other premium brand is the relatively weak Lincoln, and Ford and Volvo have extensive sharing of engineering and product development. "We have a lot of partners, and I'm sure that we would remain partners with Volvo should a sale occur." Mulally said Ford would decide Volvo's future by the end of the year. That will be determined largely by the level of interest and the prices offered.

While Mulally earns high marks for moving faster than his predecessor, Chairman William C. Ford Jr., who also tried his hand at CEO for awhile, to transform Ford, Wall Street analysts say neither he nor Ford is out of the woods yet.

The Road to Recovery

Argus Research senior automotive analyst Kevin Tynan says analysts were off the mark in their earlier assessments of the second quarter because they were looking at a wide band of estimates for Ford, but adds that the automaker still hasn't turned the corner to profitability. "The $279 million loss in North America is still a problem," Tynan says.

Bear Stearns (BSC) analyst Peter Nesvold says Ford's progress since Mulally took over the CEO post last year has been "encouraging," noting that the automaker has topped Wall Street's cash-flow projections for three consecutive quarters.

With nothing less than the future of Ford's independence hanging in the balance, a good quarter doesn't make for a recovery. For that, Mulally will have to string together four and probably eight quarters of deep black ink.

Check out the slide show to see a roundup of Ford's recent winners—and losers.

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