Ford’s Gains In North America Offset By Weakness In Europe And China

Ford has delivered earnings which indicate less misery than expected at the company. The company’s revenues saw slight erosion as it fell down by 2% on account of weakness in China and Europe. The company’s operating income fell by 61% due to lower volume of sales and a huge one time tax bill from moving tax credits and other assets back on to the balance sheet. Ford’s current tax rate is 32.5% as compared to 8% a year earlier. The company has been focusing on cutting its production costs and and has been pleasantly surprised by a superior product mix as buyers are choosing more expensive options, like its MyFord Touch touch-screen dashboard system.

Ford competes globally with automakers like BMW (GR:BMW), GM (NYSE:GM), Daimler (ETR:DAI), Audi (NSU:GR), Honda(NYSE:HMC), Toyota (NYSE:TM) and others. We have a price estimate of $16, which is around 25% above the current market price.

See our complete analysis for Ford’s stock

North America drives growth

Ford’s North American sales were up by 5.8% as the company increased its market share in the U.S. retail segment from 13.4% to 13.8%. The overall resurgence of the auto industry in U.S., which showed a 19.5% jump in sales in the last quarter, helped well for the company.

Ford’s total market share of the U.S. market, however, fell from 16% to 15.2% as many of Ford’s competitors grew more quickly. The firm’s operating income shot up from $1.8 billion to $2.1 billion on the back of strong sales and expansion in operating margin from 10.3% to 11.5%. This is the highest operating profit the company has managed in North America since 2000 and was driven by a favorable impact from higher volume, better product mix and higher pricing. An increase in manufacturing, selling and administrative costs, however, prevented these profits from reaching their full potential.

Weakness in Europe, Asia Pacific and Africa

Ford recorded losses in both Europe and Asia-Pacific-Africa regions. In Europe, the company recorded a 17% decline in sales and profits dropped from $293 million last year to losses of $149 million this year. Ford has blamed the recessionary conditions in several European countries due to poor macroeconomic fundamentals as the main culprit for this. The operating profits were hurt by loss on incentives to buyers, loss on parts & accessories from suppliers, lower industry sales and lost market share. In the Asia-Pacific-Africa region, the company recorded losses in spite of a gain in revenues and unit sales. Ford’s revenues rose by 9.5% in this region while profits declined from $33 million last year to a loss of $95 million this year. The company has attributed the declining capacity for consumption of new cars in the Chinese markets as the main reason for this slowdown. However, a closer look indicates that high structural costs of the company coupled with declining market share were the main cause for these losses.

Innovative plan to cut pension costs

Ford has decided to offer a lump-sum payment to about 90,000 U.S. white-collar retirees and former employees in an effort to cut its pension liability costs. The payouts will start in the latter half of present year and will be part of the biggest such program in U.S. history. The payment will come from pension plan assets. Ford doesn’t yet know how much the plan will cost.

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