Ford’s European Woes Will Spoil An Otherwise Strong Quarter

by Trefis Team
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Ford Motors (NYSE:F) is scheduled to announce its Q2 earnings on July 25. The company has had a tough year so far declining more than 10% as concerns over its European overcapacity begin to weigh in. The automaker performed strongly in the North American region in the first quarter but its European operations posted a pretax loss of $149 million. However, the European woes do not end there as the company is expecting to triple the losses in the region this quarter. Moreover, the recent recall of Escape SUVs has topped what has been generally been a gloomy quarter for Ford.

Europe in the Red

As per recent estimates, Ford’s production is only 63% of its total capacity in Europe. Strong labor and trade unions in the region make it difficult for the automakers to shut down manufacturing plants. And Ford is not alone when it comes to facing overcapacity issues in Europe; GM’s capacity utilization is 66% whereas Fiat’s is 57%. [1] For the first half of the year, the automaker’s European sales were down 10% compared to a 6.3% decline for the total auto sales.

Ray of Hope

But not everything is negative for the automaker. Unlike General Motors (NYSE:GM), which has lost $16.4 billion in Europe since 1999, Ford has been profitable in the six of the last eight years. Moreover, with Ford planning to introduce 20 new models in Europe by 2014, there is a glimmer of hope. [2] Even during times when the overall market witnesses a flat or even a negative growth, eating up market share is one way of generating top-line growth. And with Ford’s new models (both in North America as well as Europe) boasting of much higher mileages, you expect the automaker’s performance to improve as the new models keep launching.

On a further positive note, its North American business, which contributes more than 60% to the overall revenues, remains strong. Ford reported a pre-tax income of more than $2.1 billion, up 16% for its North American operations in the first quarter of 2012. Overall, the car sales are up 6.6% in the U.S. in the first half of the year with the growth rates for May and June standing at 14% and 7% respectively. So, expect another strong North American quarter.

We have a price estimate of $16, which is more than 50% above the current market price.

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Notes:
  1. Ford positioning for long-term recovery in Europe, July 6,2012, detroitnews.com []
  2. Ford Profit Squeezed By Excess Plant Capacity In Europe: Cars, July 20, 2012, bloomberg.com []
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