Ford Posts Strong N. American Profits But Europe Bleeds Red In The Near Term

Ford Motors (NYSE:F) announced its Q3 earnings on Tuesday as strong North American profits were partially offset by the European losses. Total revenues declined 3% to $32.1 billion while the net income stayed flat at $1.6 billion. Ford sold a total of 1.33 million vehicles in the quarter, 1% lower than the previous year quarter. ^[1]

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North America, which accounts for 60% of Ford’s revenues, remained steady. Revenue was up 1.5% to $19.5 billion and the automaker sold a total of 3% more vehicles than it did in the same quarter last year. What was particularly encouraging to see was that the operating margins for the region expanded to 12.0% from 8.6% a year earlier. Margins were helped by strong pricing due to the introduction of a slew of refreshed models this year. With the 2013 versions of Fusion and Escape, Ford might be able to snatch back some of the market share it has lost to the Japanese autos in the first nine months of 2012.

Europe To Be Loss Making in Near Term

Ford’s operating losses in Europe stood at $468 million, more than the $403 million loss it posted in the second quarter. Ford’s vehicle sales in Europe were down 16% and the automaker now expects the full-year losses to be around $1.5 billion, much more than the $1 billion estimated at the start of the year.

Last week, the automaker announced its decision to shut down 3 plants in Europe; one in Belgium and two in the U.K. This comes on top of an already announced initiative to cut 500 jobs. These shutdowns will help the automaker reduce its capacity in the region by around 18% and will result in an annual savings of almost $500 million. Currently, Ford’s capacity in Europe is pegged to be around 65%. ^[2]

Ford, like other automakers, is plagued with overcapacity issues in Europe, but the harsh labor unions and governments have made it really difficult for the companies to shut down plants in order to protect jobs. Recently, the French government decided to bailout PSA Peugeot with a guarantee of at least 7 billion euros of bond issuance since the troubled automaker was looking to cut 8,000 jobs. ^[3]

Ford is also looking to boost its top-line in the region by introducing 15 new or refreshed models over the next five years. Currently, Ford accounts for about one-sixth of the company’s revenues. However, things might get worse before they get better in Europe as the one-time expenses related to severance packages will inflate the operating expenses in Europe in the near term.

Asia Pacific Improves

With the help of higher vehicle sales, Ford was able to turnaround the region’s losses in the previous year quarter to post an operating profit of $45 million. Vehicles sales rose 20% helped by strong sales of the recently launched Focus and Ranger pickup in the region.

Although Asia/Pacific accounts for less than 10% of the Ford’s total revenues presently, the region is likely to become an important revenue stream for the company in the coming years as the automaker is in the process of building/expanding eight plants in the region. At the same time, Ford is also developing a low cost model in its Hangzhou plant in Eastern China which is due to begin production from 2015 onward. The Dearborn-based automaker also plans to roll out its luxury brand Lincoln in China from 2014 onward.

We have a $13 price estimate for Ford, but we are in the process of revising our estimates to incorporate the latest earnings.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Ford Motors 8-k [↩]
2. Ford to Shut Three Plants While Losing $3 Billion in Europe, October 25, 2012, sfgate.com [↩]
3. Paris’s Support for Peugeot Is Double-Edged, October 24, 2012, wsj.com [↩]