Earnings Review: China Growth Keeps Ford Profitable

Ford Motors (NYSE:F) reported its twentieth consecutive profitable quarter and the highest pre-tax profit since the second quarter of 2011 in the second quarter of fiscal 2014. Total revenues for the quarter declined by $500 million to $37.4 billion, while the pre-tax profit improved by $44 million to reach $2.6 billion(excluding special items). ^[1] The net revenue was dragged down by a decline in wholesale unit volumes by 17,000 units year-to-date to 1.7 million for the quarter. In the first six months of fiscal 2014, vehicle wholesales increased 2% from a year ago, while company revenue was flat. The six month pretax operating profit excluding special items was $4 billion, a decline of $721 million and net income was $2.3 billion, $544 million lower than a year ago.  ^[2]

We have an $18.7 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.

North America Shows Some Weakness But China Remains Strong

Ford’s North American wholesale volume declined by 5%, while its revenues declined by 3%. The decline in revenue is explained by lower market share and an unfavorable change in dealer stocks, offset partially by higher industry sales. ^[1] The U.S. auto market, the biggest and most profitable market for Ford, is on pace to record a 7.6% growth on last year’s volumes. Ford’s total U.S. market share was 15.3% in the second quarter, a decrease of 1.2% from a year ago and flat with the previous quarter. ^[1] This drop reflects the planned reductions in daily rental sales, a lower share of Ford’s Edge and Focus in the sales mix and the reduced production levels of the F-series. The company closed many of its factories during the quarter in order to retool them for the new F-series trucks, which will be aluminum bodied instead of steel and thus more fuel efficient. In order to compensate for the decline in production, the company pushed out extra inventory to its dealerships and offered several incentives to clear out the inventory. The operating margin for region was 11.6%, an increase of 1 percentage point from 2013 and pre-tax profit was $2.4 billion, up $119 million from last year’s record profit.

In Asia-Pacific, wholesale volume was up by 26%, while revenue jumped by 9% (excluding joint ventures in China).((Ford Motor Company CEO Mark Fields Discusses Q2 2014 Results, Seeking Alpha, July 2014)) The company’s wholesale volume in China grew by 26% over the quarter, allowing Ford to increase its market share by 0.3% over the quarter. 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 5.5%, up 0.6% from a year ago, and pre-tax profit was $159 million, up $29 million from last year’s second quarter. 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. ^[3]

Europe Improves

Ford’s total market share for Europe for the first quarter was 7.9%, down 0.2% from a year ago, reflecting a reduction in rental and fleet share. The company’s share in the commercial vehicle segment improved over the quarter to 10.6% but its share in the passenger car market declined by 0.1% to 8.3%. 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. ^[1]

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. ^[4]

See full analysis for Ford Motors

1. Ford Motor Company CEO Mark Fields Discusses Q2 2014 Results, Seeking Alpha, July 2014 [↩] [↩] [↩] [↩]
2. Ford Motors 8-k [↩]
3. Ford List of Worldwide Operations [↩]
4. Ford’s profit goal for Europe in reach, Odell says, November 22, 2013, europe.autonews.com [↩]