Earnings Preview: Expect Lower Profits From Ford This Quarter

+15.77%
Upside
12.18
Market
14.10
Trefis
F: Ford Motor logo
F
Ford Motor

Ford Motors (NYSE:F) is scheduled to announce the release of its earnings for the first quarter of fiscal year 2015 on Tuesday, April 28.  The U.S. auto maker’s management has already warned investors that 2015 is going to be an atypical year for the company. Usually, Ford makes most of its profits in the first half of the year as the second half is usually weighed down by heavy costs associated with the launch of newer models. However, in 2015, the opposite is expected — the company is still incurring heavy costs in rolling out its most profitable vehicle, the F-150 series of pick-up trucks. Below, we take a look at the sales data from the three main regions in which the company operates, to get a better sense of what to expect from the company in the first quarter.

North America

In North America, sales of Ford’s vehicles showed a slight increase of 2% in the first quarter. While the F-series, the company’s most profitable vehicle, also reported a 2.3% increase in unit sales over the first three months of the year, the overall truck segment did better, growing at 8%, driven by the sales of the full-size commercial van, Transit. [1] North America is not only the most profitable region for the company but also its most critical region, as when profits there suffer, the company’s overall profitability tends to suffer, too.  In the first quarter, profitability in the region was weighed down by the low supply of the company’s best selling F-150 pick-up trucks.  Ford is undertaking a refresh of the F-150, which earlier used to be made from a steel body, but the company closed down production at the two plants where it is manufactured — Dearborn in Michigan, and Kansas City — to allow for their retooling, so that the trucks could be manufactured with aluminum bodies. The plants are still not running at full capacity, and as a result, dealerships are running with lower inventory than usual. The company has tried to make up for the low inventory by trying to sell most of its available inventory to retail buyers, who tend to prefer higher-trim trucks, which command higher margins, as opposed to commercial buyers, who tend to buy 100’s of units all at once, often at a slight discount. As a result, the company has lost out on market share in the commercial sales segment to GM, whose Chevrolet Silverado has done really well over the quarter. Production facilities at the two plants will not reach full capacity for another two months, therefore the company’s profits in the region will only begin to increase in the second half of the year.

Relevant Articles
  1. With F-150 EV Production Cut 50%, What Lies Ahead For Ford Stock?
  2. What To Expect From Ford’s Q3 Earnings?
  3. Will Strong F-Series Sales Power Ford’s Q2 Results?
  4. Can Ford Stock Return To Its Pre-Inflation Shock Highs
  5. Higher Truck Sales Will Drive Ford’s Q1 Results
  6. Ford’s Q4 Results Were Tough, But Things Could Get Better

China

China is slowly emerging as an important region for Ford. The U.S. auto maker posted a solid quarter in the region, selling close to 297,000 cars, a 9% increase in unit sales compared to the first quarter of fiscal 2014. [2] China is not only already the world’s biggest auto market, but it is also one of the fastest growing markets. It is expected that new-car sales in China will reach 30 million by 2020, compared to 20 million in 2014. The region will contribute to close to a third of all new-vehicle sales in the world by that time period. As a result, Ford is increasing its presence in the region, both in terms of its car models and production capacity. The company recently opened its sixth assembly plant in the region, increasing its capacity by a quarter of a million vehicles. Additionally, the company also launched the Lincoln brand in the country late last year and that should soon start contributing to the company’s profits. Lincoln has received good customer response according to Ford’s management, and it is quite likely that the company will soon start producing the vehicle in the region to further drive up sales and profitability.

Europe

Since 2012, Ford has lost over $4 billion in Europe. The region has been slow to recover from the financial crisis and annual new-car sales have still not reached their pre-recession levels. However, Ford is slowly starting to turn around its operations in the region. In the first quarter, the U.S. auto maker sold more than 335,000 vehicles, representing a 12.5% increase compared to the same period last year. [3] More importantly, nearly three-fourths of those sales were made in the retail and fleet channels, which are more profitable than selling to car rental companies. [4] Ford is planning to launch the Vignale Mondeo in the region. The car is essentially a premium version of the Ford Fusion sedan and should help the company achieve a higher margin in the sales of its passenger vehicles.

Additionally, Ford seems to have benefited from the departure of the Chevrolet brand from Europe. (See: GM Targets Small Car Segment To Regain Profitability In Europe) Customers who tended to prefer the Chevrolet brand cars have taken notice of Ford, which is taking over a good proportion of sales in the change-over from Chevrolet vehicles. Despite all these bright points, the reality is that all this merely bodes well for the future, and Ford cannot be expected to report any profits from the region in 2015.

See full analysis for Ford Motors

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Ford March 2015 Sales, Ford Media, April 2015 []
  2. GM, Ford China sales rise in March, Detroit News, April 2015 []
  3. Ford’s Europe sales rise 12.5% in first quarter, Detroit News, April 2015 []
  4. Ref: 3 []