Earnings Preview: Superb Quarter in The U.S. Should Result In High Profits For Ford

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Ford Motors (NYSE:F) is scheduled to release its earnings for the third quarter of 2015 on October 27th. [1] Usually, Ford makes most of its profits in the first half of the year, as the second half is weighed down by clearance sales, model changeover costs, low production levels due to holidays, new launch costs and higher advertising expenses. However, in 2015, the opposite seems to be happening for Ford — the company incurred high costs in the rolling out a new model of its most profitable vehicle, the F-150 series pick-up truck.  But as inventory at dealerships reaches optimal levels, we expect profitability to increase. Additionally, Ford’s SUVs have done extremely well this year, boosting profitability in the near term. Below, we take a look at what can be expected when Ford releases numbers for the third quarter on Tuesday.

Comparison Effects

First, it is worth noting that whatever earnings per share numbers Ford reports on Tuesday, they’ll likely be a significant improvement over last year’s numbers. The reasons for this are manifold. For one, the company spent a lot of money in preparation for the launch of new products late last year. These models included a new version of the Edge SUV, a refreshed version of the Explorer SUV, and a new aluminum bodied version of the F-150 series of trucks. Ford had to shut down the two factories where it produces the F-150 trucks so that they could be re-tooled for the new manufacturing process. In total, the two factories stayed closed for around 3 months. The company had to carefully manage inventory levels at dealerships, having to ensure that they didn’t run out of supply to meet demand for the highest selling vehicle in the U.S.

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Contrast last year’s climate to this year’s: while Ford wasn’t selling nearly as many vehicles as it could last year, and spending heavily on soon-to-be-launched SUVs and trucks, sales of Edge and Explorer have been growing for a number of months and dealerships are close to full inventory levels of the F-150 trucks. In the third quarter, sales of the F-150, which includes figures for some of its Super Duty stylings, grew by 8.4% on a year-over-year basis. [2] Sales for the Edge grew by over 26%, while Explorer sales grew close to 29%. [3]  All of these products are higher margin than sedans and hatchbacks, so they should help profitability in North America this quarter.

China

China is already the biggest car market in the world, and it still remains one of the fastest growing. However, due to the slowdown of economic growth in the country, a currency devaluation and a stock market crash, spending on consumer goods has declined in recent months. As a result, expectations of growth in the car market have been revised somewhat. Ford’s competitor GM expects sales in China to grow somewhere between 3% to 5% over the next few years. [4] But most of this growth is expected to come from tier 2 to tier 4 cities, which form the core target market for Ford and GM. Ford has been increasing its presence in these regions, both in terms of its car models and production capacity. The company opened its sixth assembly plant in China earlier this year, increasing its capacity by a quarter of a million vehicles.

Ford 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 they are quite likely to start producing the vehicle locally to drive up sales and profitability.

Europe

Since 2012, Ford has lost over $4 billion in Europe. The company has been working on a turn around plan to cut costs, introduce new products and improve its brand image in the continent. To this end, the company has launched close to 25 new products over the last four years. The company’s new products have done well and boast high customer satisfaction and reliability ratings. In fact, the U.S. auto maker has more 5-star Euro NCAP-rated (Europe’s safety measure) vehicles than any other brand operating in the continent. [5]

Ford has also introduced a new luxury brand called Vignale in the region. This brand doesn’t directly compete with the popular luxury brands, such as those of German auto makers, but is an attempt to retain Ford customers who might want to upgrade their vehicle but would like to remain with Ford. Additionally, Ford has also gained significantly on the commercial vehicle front, and is the leading seller to businesses in the region. [6] However, we don’t expect the company to be profitable in Europe soon. It is likely to report losses again in the third quarter in the region.

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Notes:
  1. Ford Investor Relations []
  2. FordU.S.Retail SalesBestSince 2004; Overall Sales Up23PercentonStrongCustomerDemand for NewVehicles, Ford Corporate Media, October 2015 []
  3. Ref: 1 []
  4. General Motors (GM) Mary Teresa Barra on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, October 2015 []
  5. Euro NCAP Safety Ratings, Euroncap.com []
  6. Ford Europe Sales Rise 12% in August on Demand for Mondeo, SUVs; Ford Takes No. 1 in Commercial Vehicles, Ford Online, September 2015 []