Strong F-150, SUV Sales In North America Boost Ford’s Profits

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Ford Motor

Ford Motors (NYSE:F) announced earnings for the third quarter of fiscal 2015 on Tuesday, October 27th. As we predicted, Ford strongly outperformed its numbers from last year, bringing in net income of $2.86 billion compared to last year’s $1.02 billion. [1] Automotive revenue for the quarter stood at $35.8 billion, an increase of over $3 billion compared to the third quarter of fiscal 2014. [2] While the company lost money in Europe and South America, it reported record profits in North America ($2.67 billion), on the back of higher average transaction prices and strong sales across the product segments. [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.

Strong F-150 Sales Boost North America Profitability

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Ford was targeting an operating margin in the higher end of the 8.5-9.5% range in North America for the full year, but it already has achieved an operating margin of 9.1% for the first half of the fiscal year 2015. [4] In the third quarter, Ford’s North America operating margin stood at 11.3%, even better than its performance in the last quarter. [5] Moreover as inventory levels of the F-150 line of trucks approach maximum capacity at dealerships, this margin should be expected to go even higher as it is one of the most profitable vehicles for the company. [5]

North America is the most critical region for Ford since it earns almost all of its profits from the region. This was an extremely good quarter for Ford as it improved its market share in both North America and the U.S., overall; it also grew its retail market share in the U.S. In the July to September period, sales of the F-150 grew by 8.4% on a year-over-year basis. [6] Sales for the company’s SUVs Edge and Explorer sales grew by 26% and 29%, respectively. [3] We expect these trends to continue over the coming quarters as F-150 trucks are a North American staple and SUVs are one of the fastest growing segments in the U.S. auto market.

Europe Improving

Ford’s total market share in the twenty biggest markets in Europe for the third quarter of the fiscal year decreased slightly due to the launch of the S-Max and Galaxy MPVs and the aging of the Ford Fiesta. [3] But driven by a slightly better sales mix, the company posted a modest increase in reported revenue of 2%. however, excluding currency changes, revenue was up 16%. [5] Operating losses decreased by $257 million to $182 million compared to $439 million last year. [5] 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. Additionally, Ford aims to introduce 25 new or refreshed models in Europe over the next five year period. Success on these two fronts should help Ford in its quest to return to profitability in the region by end of next year.

China Slowdown On The Horizon

Ford maintained its market share in China from last quarter at 4.7%. [5] However, as a result of the impact of the currency mark down, slowing GDP growth and the stock market crash, Ford’s dealerships had to resort to offering significant incentives in order to persuade buyers to spend on cars. Consequently, Ford’s reported equity income fell by 15% in dollar terms compared to last year. [5] Additionally, since Ford’s profitability in the region in the preivous quarters was mostly driven by lower costs and a favorable exchange rate, the results of the slowdown could linger for a while. However, since the fourth quarter in China has a number of holidays and the Chinese Government has announced a stimulus package for the auto industry, some of these effects might not be visible in the near term.

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Notes:
  1. Ford Q3 2015 Earnings Presentation, SEC []
  2. Ref :1 []
  3. Ref: 1 [] [] []
  4. Ford 10-Q, SEC []
  5. Ref: 2 [] [] [] [] [] []
  6. FordU.S.Retail SalesBestSince 2004; Overall Sales Up23PercentonStrongCustomerDemand for NewVehicles, Ford Corporate Media, October 2015 []