North American Sales Lift Ford’s Earnings, Europe Shows Improvement

by Trefis Team
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The continued improvement in Ford Motors‘ (NYSE:F) North American operations and surging Chinese sales helped the company post impressive third quarter numbers. Ford now expects the full year pretax profit as well as automotive operating margins for 2013 to be higher than those in 2012. It earlier expected these figures to match those in 2012.

Total revenues for the quarter rose 12% to $36 billion while operating income improved 19.7% to $2.6 billion. On the contrary, net income declined 22% to $1.3 billion or 31 cents a share, primarily due to special items charges of $498 million related to European restructuring and the U.S. Pension lump sum program. [1]

We have a $17 price estimate for Ford, which is in line with the current market price.

North America Delivers Yet Again

North America is the biggest market for Ford and accounts for about half the unit sales. During the quarter, Ford’s unit sales in North America grew 13% over the previous year period. Moreover, North American operating margins stood at a stunning 12%, or 140 basis points, more than the previous year figure. Anything above 10% is considered excellent in the automotive industry.

Margins were helped by higher F-Series pickups sales, which were up 20.7% through September. Generally, pickups and SUVs have higher margins compared to mainstream cars. In addition, a flurry of model refreshments last year in the compact car and sedan segments helped Ford post wider margins.

The recovery in the U.S. housing market is fueling growth in pickups, which are used extensively for construction activities. As a result, the North American margins should continue to remain strong, at least in the near term.

European Operations Show Progress

Ford’s European losses narrowed to $228 million from $468 million in the third quarter of 2012. Ford is in the process of shutting down three plants in the region, which will see its workforce shrink by 6,200 employees. The one-time charges related to restructuring are now categorized by the company under ‘special items’. This wasn’t the case until last year. If you include the losses posted in the special items, Ford’s operating losses were flat.

On the other hand, Ford’s unit sales in Europe rose 5% during the third quarter. The fact that Ford was able to grow its unit sales is definitely a big positive for the company. The automaker has already introduced eight out of the fifteen new vehicles promised as part of its turnaround plan. Had the automaker not been able to grow volumes despite the model refreshments, it would be a cause for concern. Overall, Ford’s European performance looks like a step in the right direction.

It is highly critical that the brand Ford resonates positively with Europeans. A strong brand will help Ford accelerate sales whenever the market starts consolidating again. In fact, recent economic data coming out of Europe points to a bottoming out of the automotive market. The market has grown twice in the last three months.

Chinese Sales Soar

Burgeoning Chinese sales boosted Ford’s Asia Pacific unit sales by 35% to 0.35 million units. The introduction of the Kuga, the EcoSport, the Edge and the Explorer appeal to value-seeking customers in the developing markets of Asia. Ford has consistently posted monthly sales gain in excess of 40% in the last few months in China. The automaker intends to introduce a total of 15 new vehicles by 2015.

The company’s profits in the broader Asia Pacific region are now beginning to gain traction as its operating profits almost tripled to $126 million from a year ago. Until the first quarter of 2013, Ford had barely managed to breakeven in the Asia Pacific region, but this is slowly changing. In the second quarter, the automaker’s profits swelled to $177 million. [2]

Ford’s profitability should improve as it gains a stronger foothold of the Chinese market.

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Notes:
  1. Ford 8-k []
  2. Ford Motors 10-Q []
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