Ford Earnings: Bad Weather And Currency Fluctuations Affect Profitability

Ford Motors (NYSE:F) reported another quarter of profit helped by solid sales in North America and record sales in China. Total revenues for the quarter improved by 1% to $35.9 billion, while the net income declined by $622 million to $989 million or 24 cents per share. The net income was dragged down by several one-time charges, to the tune of $900 million. These factors are not representative of the underlying costs associated with the company’s business and therefore, we don’t expect the company to be affected by them in the coming quarters. During the quarter, the automaker’s global sales rose 6% to 1.6 million units. ^[1]

We have a $18.66 price estimate for Ford, which is about 12% more than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.

Several Adverse Factors Ate Into Ford’s Profits

Ford’s pre-tax profit trailed the 2013 figure by $765 million due to a number of factors which deteriorated its margins. This will be a very busy year for Ford as it plans to roll out 16 new or refreshed models in the U.S., including the revamped version of its best selling F-150. Extra cost associated with the changeover of the F-150 is one of the reasons why the automaker has been on the 2014 outlook. ^[2] Ford anticipates its North American operating margins to slide to 8-9% this year, as a result of these extra expenses. ^[1] There could also be some pressure on its pricing as the company battles opportunistic pricing from the Japanese automakers such as Toyota and Honda. Now that the yen has devalued more than 25% in the last twelve months, Japanese companies have the cushion to cut the prices of their vehicles.

Additionally, the company incurred costs of $400 million due to an increase in warranty reserves for field service actions, which include safety recalls and other product campaigns. The automaker also experienced premium freight and labor cost of about $100 million during the quarter related to harsh winter weather in the U.S., which disrupted its operations as well as those of its  suppliers. ^[3]

Currency fluctuations in South America also ate into its profits. The Venezuelan Bolivar declined to 10.8 bolivars a dollar, from the ~6.3 bolivars a dollar at the beginning of the quarter. This had a negative effect of $400 million on the company’s pre-tax earnings. Overall, Ford expects to generate a pre-tax profit of $7-8 billion in 2014, compared to $8.6 billion in 2013. ^[3]

North America Shows Some Weakness But China Remains Strong

Ford’s North American wholesale volume declined by 2%, while its revenues declined by 5%. The decline in revenue is explained by reduced wholesale volumes, a higher sales mix of lower priced cars and unfavorable effects of a weak Canadian dollar. The operating margin for region was 7.3%, a decline of 3.8 percentage points from 2013 and pre-tax profit was $1.5 billion, about 37.5% lower than last year’s record profit. The adverse impact of warranty reserve costs and premium air freight costs contributed about 2 percentage points to the decline. ^[3]

Ford’s total U.S. market share was 15.3% in the first quarter, a decrease of 0.6% from a year ago. This drop reflects the planned reductions in daily rental sales and lower small car retail share. Compared with the fourth quarter, the market share was down 0.1%. Looking ahead, the company expects pre-tax profit to be lower than last year and operating margin to range from 8% to 9%. ^[3]

In Asia-Pacific, wholesale volume was up by 32%, while revenue jumped by 19% (excluding joint ventures in China). The company’s wholesale volume in China grew by 45% over the quarter, as it looks set to overtake Nissan and Hyundai’s market share in the region. The growth in market share in China reflects the continued strong performance of Ford’s EcoSport, Kuga and Mondeo models. The region’s operating margin was 11.1%, up 12.4% from a year ago, and pre-tax profit was $291 million, up $319 million. Strong results in China drove the region’s record profit. The improvement in the region’s profitability is attributable to improved volume, favorable sales mix and higher royalties from the company’s joint ventures in China. ^[4]

Europe Improves

Ford’s total market share for Europe for the first quarter was 8%, up 0.3% from a year ago, reflecting improved share from Mondeo and Kuga. The company’s share in the commercial vehicle segment improved over the quarter but its share in the passenger car market declined by 0.1%. The automaker is still trying to achieve an optimal sales channel mix for the region, with a special focus on achieving a higher share of the fleet segment. ^[3]

Ford had earlier aimed to introduce a total of 15 new or refreshed models in Europe over the next five years, but now plans to raise that figure to 25, starting with the debut of the affordable SUV EcoSport early this year. In addition, the European built Mustang will be introduced this year as well. With a more stable automotive market and new model introductions, Ford expects its operating losses to narrow to $400 million in 2014. Furthermore, the automaker estimates it will breakeven in 2015. ^[5]

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1. Ford Motors 8-k [↩] [↩]
2. Ford Sees ‘Building-Block Year’ After ’13 Profit Gain, January 29, 2014, bloomberg.com [↩]
3. Ford Motors’ CEO Discusses Q1 2014 Results, Seeking Alpha, April 2014 [↩] [↩] [↩] [↩] [↩]
4. Ford List of Worldwide Operations [↩]
5. Ford’s profit goal for Europe in reach, Odell says, November 22, 2013, europe.autonews.com [↩]