Earnings Review: Record Profits In North America Boost Ford’s Spirits

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

Ford Motors (NYSE:F) announced earnings for the second quarter of fiscal 2015 on Tuesday, July 28. The numbers were encouraging : the company’s net income stood at $1.89 billion, up $571 million compared to a year ago. [1] The revenue for the quarter stood at $35.1 billion, a decline of $250 million compared to the second quarter of fiscal 2014. [2] While the company lost money in Europe and South America, it reported record profits in North America ($2.6 billion), on the back of higher average transaction prices and strong sales across the product portfolio. [3]

We have a $15  price estimate for Ford, which is inline with the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.

High North America Profitability

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

For the full year, Ford was targeting an operating margin in the higher end of the 8.5-9.5% range in North America. However, Ford has already achieved an operating margin of 9.1% for the first half of the fiscal year 2015. [4] With an expected increase in F-150 production of close to 20%, this margin should be expected to go even higher as the F-150 is one of the most profitable vehicles for the company and has been commanding higher than usual transaction prices throughout the year. This might change somewhat as Ford has been restricting sales to commercial buyers, who tend to buy units at slightly lower prices than retail buyers. They generally prefer the higher-trim units which command higher margins. [3]

[trefis_forecast ticker=”F” driver=”0103″

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 undertook 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 (Michigan) and Kansas City — to allow for their retooling, so that the trucks could be manufactured with aluminum bodies. The plants only reached full capacity toward the end of the quarter and, as a result, dealerships were running with lower inventory than usual. On account of the low inventory, the company focused on selling most of it to retail buyers, who tend to prefer higher-trim trucks that generate higher margins, as opposed to commercial buyers, who tend to buy hundreds of units at at a time with a slight discount. As a result, the company has lost out on market share in the commercial sales segment to GM, generating strong sales for its Chevrolet Silverado.

Europe Improves

Ford’s total market share in the twenty biggest markets in Europe for the first half of the fiscal year increased on the back performance of the newly introduced line of compact vehicles. [3] Ford was also the leading commercial brand in Europe in the first quarter. 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.

Ford aims to introduce a total of 25 new or refreshed models in Europe over the next five years.  Going forward, the company expects the impact of a more stable automotive market and new model introductions to be offset by uncertainty surrounding Russia and higher pension expenses.  As a result, Ford expects its operating losses in the region to be  $250 million in 2015. [5]

China Slowdown

While Ford’s profitability in the quarter was boosted significantly by the rise in equity income from its joint ventures in China, its performance in the second half of the fiscal year in China will likely be less favorable. Ford’s profitability in the region was mostly driven by lower costs and a favorable exchange rate. In the first six months of the year, Ford sold close to 543,500 units in China, roughly the same as the number from a year ago. [6] For the full year, Ford sold 1.1 million units in 2014. In 2015, Ford expects to launch 15 new models in the region, including the luxury car Lincoln Continental. [3] The recent stock market crash and slowdown in economic growth will affect the overall market and this was reflected in Ford downgrading its forecast of total units sold in China from a range of 24.5 million to 26.5 million to a range of  23 million to 24 million. [3]

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 Q2 2015 Earnings Presentation, Ford Investor Relations []
  2. Ref :1 []
  3. Ref: 1 [] [] [] [] []
  4. Ford 10-Q, SEC []
  5. Ref: 2 []
  6. Ref 2 []