Ford Motors (NYSE:F) announced its Q2 earnings on July 25. The stock is down more than 15% since the start of the year mainly on concerns of its loss-making international operations. Total revenue for the quarter declined 2.2% to $33.3 billion. Furthermore, net income dropped 57% to $1 billion, or 26 cents a share, as the large overseas losses mitigated the North American profits. Total operating losses for the international operations stood at $465 million, out of which Europe contributed the lion’s share.  However, the figures still came in better than expected after Ford announced in June that it expected the international losses to triple from that in the first quarter (Q1 losses stood at $190 million before tax)
Although the automaker sold fewer vehicles in Q2 2012 than it did in the previous year’s corresponding quarter, it had a higher operating profit. Improved margins helped the automaker post an operating profit of $2.01 billion, an increase of 5.5% on a y-o-y basis. Operating margins stood at 10.2%. North American sales have benefited from cars with better mileage (by the end of the year, Ford will have eight cars in its portfolio with a mileage in excess of 40 mpg) and new launches such as Ford Escape. Moreover, with the new Ford Fusion being launched later in the year, sales as well as margins could get a further boost.
South American operations also suffered badly as the automaker could only manage an operating profit of a meager $5 million; erasing out almost the entire $267 million profit from the previous year’s quarter. Asia Pacific/Africa performance deteriorated as the company lost $66 million in the quarter. In China and Asia/Pacific in general, higher costs to support the growth initiatives are affecting the short-term profitability. Currently, Ford’s presence trails that of other auto giants in Asia/Pacific. But Ford is determined to close that gap and is going full throttle with investments in the region. As a matter of fact, eight plants are being constructed in the region, which will see the company shore up the production significantly. Ford also plans to introduce 15 new car models in China by 2015.
…And The Ugly
Ford’s European operations posted a loss of $403 million for the quarter. Currently, only 63% of Ford’s capacity is being utilized for production, which means the automaker lost $1,125 for each vehicle sold in Europe.  For the full year, Ford now expects the European losses to top $1 billion. Strong labor and trade unions have made it almost impossible for auto companies to shut down plants, and hence Ford plans to lay off temporary workers in the region to reduce costs. 
We are in the process of revising our $16 price estimate for Ford to incorporate its Q2 earnings.Notes:
- Ford 10-Q [↩]
- UPDATE 5-Ford sees smaller 2012 profit, $1 bln loss in Europe, July 26, 2012, reuters.com [↩] [↩]