Ford Profit Slips as North America Counters Europe LossKeith Naughton
Ford Motor Co., the second-largest U.S. automaker, said third-quarter profit exceeded estimates, slipping 1.1 percent, as its North America unit delivered record earnings that made up for higher taxes and losses in Europe.
Ford reported its 14th consecutive profitable quarter, with net income of $1.63 billion, or 41 cents a share, compared with $1.65 billion, or 41 cents, a year earlier. Excluding one-time items, the profit was 40 cents a share, exceeding the 30-cent average estimate of 19 analysts surveyed by Bloomberg.
Chief Executive Officer Alan Mulally, who revealed plans Oct. 25 to close three European factories, is attempting to engineer a turnaround adapting the strategy that worked in the U.S. Ford had a pretax operating loss of $468 million in Europe in the third quarter, from a loss of $306 million a year earlier. The automaker lost $553 million in Europe in the year’s first half and has said it expects deficits in the region of more than $1.5 billion this year and again in 2013.
“Europe has been the biggest drag on the shares,” Peter Nesvold, an analyst with Jefferies & Co. who has a buy rating on Ford, wrote today. “You’ve now seen what the company did in transforming North America. One has to believe the shares have tremendous upside if the company comes even close to replicating that success in Europe.”
In North America, where Ford generates most of its sales and profits, the automaker reported record pretax operating income of $2.3 billion, lifted by higher prices and a $400 million improvement on commodity hedges. Ford said its North American operating margin was 12 percent for the quarter. The region earned $1.6 billion in the same period a year earlier.
“This is the third quarter in a row where we earned over $2 billion and the third quarter in a row with an operating margin over 10 percent,” Chief Financial Officer Bob Shanks said of North American profits. “The story isn’t just the results in the quarter, but the consistency.”
Structural costs, including engineering, manufacturing and marketing expenses, will rise in the fourth quarter, he said. “Don’t expect the results to be as strong as this quarter,” he said.
Ford’s decline in net income came from a change in its tax rate to 30 percent this year, from 10 percent last year, which lowered net income by $400 million, Shanks said in an interview. Ford’s tax rate changed after it removed an allowance for past losses from its balance sheet in last year’s fourth quarter.
Ford’s improvement in North America was aided by a $200 million positive adjustment to warranty costs and a $100 million gain from hedging for commodity prices, Shanks said. Commodity hedges cost the company $300 million in last year’s third quarter.
In the first half, Ford earned $4.14 billion in North America and had an operating profit margin of 10.8 percent. Ford’s U.S. car and light truck sales rose 5.3 percent through September to 1.69 million, according to researcher Autodata Corp.
Ford’s success in North America is building confidence that the same plan can revive its European operations, Joseph Spak, an analyst with RBC Capital Markets in New York, wrote today. In the last two years, Ford has earned a pretax profit of $11.6 billion in North America after losing $6.3 billion in the region in 2008 and 2009.
“The strength in North America is significantly better than thought,” wrote Spak, who has an outperform rating on Ford. “We believe this playbook should eventually drive improved European profitability.”
Ford said last week it doesn’t expect to make money again in Europe until mid-decade. A stubborn sovereign-debt crisis has sent auto sales skidding to their lowest level in 19 years. Ford has said they may fall further next year before a modest rebound in 2014.
Ford has fallen 14 percent in the past 12 months as European losses have grown. The shares fell 0.3 percent to $10.36 on Oct. 26, the last day before Hurricane Sandy caused New York trading to be suspended.
“The European issues have caused me to pull back and reassess,” said Gary Bradshaw, fund manager for Dallas-based based Hodges Capital Management, who sold more than half his Ford holdings at a loss and is reconsidering the 100,000 shares he has left. “Domestically, they’re doing just fine, but the European issues seem to linger and that’s the painful part.”
It will probably get worse before it gets better in Europe, Shanks said in an interview.
“Everyone’s going to have to be a little patient,” the CFO said. “We don’t think next year is going to look much better, in fact maybe worse.”
European governments need to enable automakers to reduce factory capacity instead of enacting policies that artificially prop up the market and prevent plant closings, Shanks said.
“What they need to do is allow the industry to restructure,” he said. “To the extent they could actually facilitate or midwife that, that would be fabulous. We don’t expect that to be what they’ll do, but really that’s what needs to be done. The industry needs to restructure.”
Ford plans to cut 6,200 employees in Europe, or 13 percent of its workforce there. It said next year it will close a Transit van plant in Southampton, England, and a stamping plant in Dagenham, on the outskirts of London. In 2014, Ford plans to close a factory in Genk, Belgium, that builds the Mondeo mid-sized car, the S-Max wagon and the Galaxy minivan.
Ford has cut production in Europe and is paring dealers’ inventory. That reduces revenue, which Ford records when it sends vehicles to dealers. Ford is “trying to battle” heavy discounting in Europe, where it managed to “eke out” a $26 million improvement in net pricing, Shanks told reporters today.
Third-quarter revenue fell to $32.1 billion, from $33.1 billion last year. Automotive revenue of $30.2 billion trailed the $31.3 billion that was the average of 11 estimates.
In the U.S., the redesigned Escape small sport-utility vehicle is helping push up the prices consumers pay for Ford models, said Ivan Drury, an analyst for researcher Edmunds.com. Consumers are opting for more well-equipped models, he said.
U.S. consumers paid an average of $33,376 for Ford models in the third quarter, up 3 percent from a year ago, according to Edmunds. Ford’s average prices are up 27 percent from 2002 and 13 percent from 2007.
Ford’s pretax profit per vehicle reached $3,533 in the third quarter, which is probably a record, Shanks said. Consumers on average paid $700 more per vehicle in the third quarter over the year-earlier period, he said.
“The technology that we’re putting in the vehicles is sort of a two-edged sword because, clearly, from Consumer Reports we’re taking it on the chin,” Shanks said of a report yesterday that listed Ford next-to-last in reliability due in part to complaints about touch-screen dashboard controls. “But we actually are attracting people because of that technology.”
In Asia-Pacific and Africa, Ford reported pretax operating income of $45 million, from a $43 million loss last year. Ford said sales of its commercial and passenger models rose 11 percent in China in the year’s first nine months, to 428,083 vehicles. Ford is spending $4.9 billion on nine new Asian factories and bringing the Lincoln line to China in 2014.
In South America, Ford reported pretax operating income of $9 million, down from a profit of $276 million a year ago. Ford made $5 million in South America in the second quarter as heavy discounting, weakening currencies and changes in government policies took a toll.
Automotive debt, which excludes Ford Motor Credit, was $14.2 billion on Sept. 30, unchanged from June 30.
Ford has more debt than rivals because it borrowed $23.4 billion in late 2006 and avoided the bailouts and bankruptcies that befell the predecessors of General Motors Co. and Chrysler Group LLC in 2009. The automaker put up all major assets as collateral, including its blue oval logo.
Ford recovered control of those assets May 22 when Moody’s Investors Service became the second major rating company, after Fitch Ratings, to raise the automaker to investment grade. Standard & Poor’s still rates Ford one step below that level.
“GM has still got the dead weight of government involvement limiting their flexibility,” said Jim Kee, president of South Texas Money Management in San Antonio, who bought 1.2 million shares of Ford and 500,000 shares of GM in February on the expectation they’ll rise 30 percent to 50 percent. The U.S. still owns 32 percent of GM.
“Here in Texas, there’s still a lot of people who will choose Ford over GM for that reason.”