Ford’s Earnings Preview: Strength In China, US Should Keep Bottomline Growing

Ford Motors (NYSE:F) is scheduled to announce its Q3 FY14 earnings on October 23. The company finished 2013 on a high, recording an 18th consecutive quarter of pre-tax profit and its automotive division posted unprecedented cash flow of $6.1 billion for the full year. However, shares of the automaker fell soon thereafter when the company announced that it expects its margins to face a downward pressure in 2014. For 2014, the automaker had anticipated the full year profits to be in the region of $7 billion to $8 billion. ^[1] At the recent an informative Investor Day, however, the company reduced this guidance to $6 billion to reflect weaker than expected profit contributions from South America and Russia, as well as higher than expected warranty (including recalls) expense.  The more cautious guidance can be seen in light of the company’s plans for an extensive re-haul of the company’s product line up, which itself is part of the ongoing platform consolidation the company has undertaking to reduce expense and quicken time to market. In 2014, the automaker will roll out 23 new models globally, the most aggressive product launch made by the company in its history.

We have a $18.66 price estimate for Ford, which is about 20% more than the current market price.

North America To Deliver Most Of The Profits

In the second quarter, 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. ^[2] 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. ^[2]

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 its Kansas City and Dearborn plants during the previous 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 this quarter, we expect the trend to reverse as most of the decline in the number of units sold in the previous quarter was due to the shut down of production in Ford’s factories. Absent that, the company’s sales should have stayed flat or even increased compared to the past year. With the launch of the new, lighter bodied F-150 series of trucks, we’d expect Ford to deliver higher numbers and higher profits from North America in this quarter.

European Operations Could Improve Further

In Europe, the company expects reduced losses as the European transformation plan remains on track to achieve profitability by 2015. The year started off poorly for Ford in Europe, but a spate of model refreshments and new introductions have helped the automaker outperform the broader market in the last few months. 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. ^[3] In addition, the European built Mustang is ready to be introduced as well. The automaker is also adding a premium car Vignale to its product portfolio, which the company believes should improve its image. It is highly critical that as a brand Ford resonates positively with European consumers. A strong brand will help Ford accelerate sales whenever the market starts consolidating again.

Chinese Sales Keep On Surging

Ford’s sales in the country were so strong in 2013 that the automaker overtook Honda and Toyota as the fifth largest shareholder of auto sales by foreign companies in the region. Ford’s sales have shown continued strength in 2014 as well as the company recorded a 45% expansion in the first quarter of 2014 and a 26% expansion in the second quarter of 2014. The company is set to overtake Nissan and Hyundai in the region. ^[4] Vehicle sales were boosted by the introduction of seven new or refreshed models including the EcoSport, the Kuga, the Fiesta and the Mondeo, which appeal to the value seeking Chinese customers. With close to a million unit sales, China has now become one of the biggest markets for Ford.

It is also important to note that sales growth in 2013 was unusually higher due to the introduction of a number of new, mass-appealing vehicles. We expect this trend to continue as the company has announced that it plans to add 15 new models to its fleet in China. ^[5]  With a number of higher end models still to be introduced (such as the Lincoln brand), the next set of vehicle introductions should have a greater contribution towards the profits, if not towards the unit sales growth.

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1. Ford Cautions About Earnings Growth, December 18, 2013, wsj.com [↩]
2. Ford Motor Company CEO Mark Fields Discusses Q2 2014 Results, Seeking Alpha, July 2014 [↩] [↩]
3. Ford’s profit goal for Europe in reach, Odell says, November 22, 2013, europe.autonews.com [↩]
4. Ford Motor Company CEO Mark Fields Discusses Q2 2014 Results, Seeking Alpha, July 2014 [↩]
5. Ford Mustang Gallops Into China, IOL Motoring, April 2014 [↩]