Ford’s Best to Come as Record Profit Precedes Sales Surge
Ford Motor Co. (F), fresh off record first-half profit in North America, has plenty left in the tank as it builds more of the models pacing the U.S. auto industry’s growth.
Ford, the second-largest U.S. automaker, made $4.77 billion in its home region during the year’s first six months, driven by surging demand for Fusion family cars and F-Series pickups. The Dearborn, Michigan-based company is adding factory capacity to build more of both of those models starting this quarter.
Even with limited supply of models such as Fusion, which quickly became one of the top-selling cars in the U.S., Ford has gained the most share in a home market that continues to accelerate more rapidly than analysts estimated. Industry sales in July may again run at an annualized pace of almost 16 million, Ford said, keeping the U.S. on pace for the most deliveries of cars and light trucks since 2007.
“Did we probably leave a few sales on the table? Yeah, probably,” Mark Fields, Ford’s chief operating officer, said yesterday on a conference call. “We’re rectifying that as we go into the second half of the year.”
Unlike 2007 or 2000, when U.S. sales peaked at 17.4 million, Ford’s namesake brand has a more complete lineup, including competitive small and mid-size cars. With a new F-150 coming next year, the company may be poised for even better results.
Ford raised its outlook for automotive operating margin and cash flow for the year while cutting its loss forecast for Europe. It’s applying a restructuring plan there similar to Chief Executive Officer Alan Mulally’s strategy that led to North America’s record profit.
“We’ve said before that the company has the potential to grow earnings significantly over the next two to three years,” Peter Nesvold, a New York-based auto analyst for Jefferies Group LLC, wrote today in a report. “With favorable trends in the U.S. from replacement demand and the housing recovery, a likely bottoming in Europe, and growing market share in Asia, we like what we see.”
Ford reported second-quarter net income of $1.23 billion, or 30 cents a share, yesterday in a statement. Excluding some items, the per-share profit was 45 cents, exceeding the 37-cent average estimate of 17 analysts surveyed by Bloomberg.
The shares slipped 0.9 percent to $17.21 at 9:33 a.m. New York time after finishing at $17.37 yesterday, their highest close since January 2011. Ford gained 34 percent this year through yesterday, outpacing an 18 percent increase for the Standard & Poor’s 500 Index.
The success for Ford and the other Detroit Three carmakers is being achieved even as the Motor City this month filed for the largest municipal bankruptcy in U.S. history. The predecessors of General Motors Co. (GM) and Chrysler Group LLC sought court protection of their own in 2009 and received government bailouts. Ford avoided bankruptcy by borrowing $23.4 billion less than three years earlier.
“It’s a searing experience,” Chief Financial Officer Bob Shanks said of the company’s restructuring. “It’s something you never forget.”
For Detroit, “it’s just going to be good when it’s all said and done, and I think we’re a good example of that,” he said. “We went through a horrible restructuring. We know what it’s like.”
Ford earned $35.2 billion from 2009 through 2012 after losing $30.1 billion in the previous three years.
In North America, Ford has earned $2 billion or more, with an operating margin of 10 percent or more, in five of the past six quarters. The $2.3 billion second-quarter profit in the region was achieved with U.S. industry sales still running at roughly 1.5 million vehicles short of the 2000 peak.
The results in North America are being driven by sales gains, especially of lucrative F-Series pickups, said Matthew Stover, an analyst with Guggenheim Securities. Reviving U.S. housing sales and a domestic energy boom are fueling demand for full-size trucks, with F-Series deliveries jumping 26 percent to 198,643 during the quarter.
“Everything came in a little bit better than what you’ve been looking for,” Stover, who is based in Boston, said in a telephone interview. “Collectively, that adds up to something.”
The consistent performance by Ford’s operations in North America will flow more to the bottom line as the turnaround efforts in Europe progress and as the company starts earning bigger profits in Asia, Shanks said.
“We’re reaching a stage where you are going to start seeing these overseas operations progressively start to really contribute more, where they’re carrying their weight,” Shanks said in an interview.
Growing demand for Focus in China and Fusion in the U.S. shows that efforts by Mulally, 67, to improve Ford’s lineup are paying off. Attractive cars from Ford, GM and Chrysler and their dominance in the resurgent full-size pickup segment drove all three to gain U.S. market share in the first half for the first time since 1993.
For this year, Ford raised its pretax profit forecast, saying it will equal or exceed last year’s $8 billion after earning $4.7 billion in the first half. The company previously projected its annual result would be in line with last year’s.
The automaker also raised its annual automotive operating margin forecast to about equal to last year’s 5.3 percent, after previously estimating the figure could be in line with or less than the 2012 result. Automotive operating cash flow will be more than last year’s $3.4 billion, Ford said, after exceeding that amount in the first half.
Ford narrowed its loss forecast for Europe to about $1.8 billion from $2 billion. The automaker is seeing progress there from reducing production capacity and devoting more of its sales to retail buyers instead of fleets or dealer self-registrations.
Deliveries of the Focus increased 69 percent in China during 2013’s first six months, positioning Ford as one of the fastest-growing carmakers in the world’s largest auto market. In the U.S., the Fusion family car climbed to the No. 7 best-selling model during the first half after ranking outside the top 10 a year earlier, according to researcher Autodata Corp.
“If Ford wants to be successful, Ford is going to have to execute on their global passenger cars as well” as trucks, Michael Razewski, a principal at Douglas C. Lane & Associates, which oversees $3.1 billion including Ford shares, said by phone in New York. In Asia, “the investments in scale and infrastructure there are finally starting to pay off.”
Ford’s Asia Pacific Africa operations earned a record $177 million in the quarter after losing $66 million a year earlier. The automaker is introducing 15 new vehicles in China by 2015 to try to catch up with market leaders GM and Volkswagen AG. (VOW)
“Who would ever have thought we could be touching almost every market segment within a couple of years?” Mulally said.
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