Ford’s Second-Quarter Surge May Be as Good as 2014 Gets
Ford Motor Co. (F)’s surprisingly strong second-quarter profit may be as good as it gets this year for the automaker as it ramps up spending to introduce 23 new models and to restructure its European operations.
Its first quarterly profit in Europe in three years, record earnings in North America and soaring sales in China powered Ford to net income of $1.3 billion, or 32 cents a share, compared with $1.23 billion, or 30 cents, a year earlier, according to a statement yesterday. Excluding one-time costs, second-quarter profit was 40 cents a share, beating the 36-cent average estimate of analysts surveyed by Bloomberg.
A sharp focus on cost cutting helped propel Ford’s North American operations to a pretax profit of $2.44 billion, even as revenue in the region declined. Europe also benefited from reductions in costs for materials to produce cars as the region earned $14 million in the second quarter. There will be pressure on profits in the second half of the year, though, Ford said, as it overhauls factories to roll out new models.
“Forty cents in the second quarter is as good as it’s going to get,” said Adam Jonas, an analyst with Morgan Stanley with an “overweight” rating on Ford. “Despite the volume being down, they had a great cost performance. But ultimately, revenue still drives the day.”
Ford’s automotive revenue fell to $35.3 billion, from $36 billion a year ago and trailed an estimate of $36.3 billion, according to the average of nine estimates.
Yet the second largest U.S. automaker still managed to boost pretax profits 1.7 percent to $2.6 billion in part by reducing material costs by $483 million in the second quarter. Those costs include how much Ford pays for parts and how efficiently it designs and builds its cars and trucks.
Ford also benefited from a “quiet period” in new model launches in the second quarter, as costs for factory conversions and introductory ad campaigns slowed, said Chief Financial Officer Bob Shanks.
“What we’ve got is a balancing act right now and it all just worked to give us the fantastic results we had in the quarter,” Shanks said in an interview. “But clearly, we’re investing right across all parts of our business for the long term.”
Costs will increase in the third quarter as Ford takes down one of two factories that produces the F-150 pickup, its most profitable product, to convert it to build a new aluminum-bodied version. The shutdown at a factory in Dearborn, Michigan, will begin in late August and lower Ford’s profits in the third quarter, Shanks said.
“You’ll have more of those down weeks in the third quarter,” Shanks told analysts on a conference call yesterday. “Clearly, when we’re down, we’re not producing, so the profit effect would be greater, in terms of launch costs, launch effect, in the third quarter.”
The F-150 arriving in showroom at year’s end sheds more than 700 pounds (318 kilograms) to improve fuel economy, mostly by using aluminum instead of steel in its body. In 2013, Ford’s F-Series truck was the top-selling vehicle line in the U.S. for the 32nd consecutive year, with sales rising 18 percent to 763,402. That helped drive Ford’s North American pretax profits to a record $8.78 billion last year.
“The F-150 changeover to aluminum is the largest, most complicated launch in the history of the company,” Jonas said. “It’s going to be a very painful process. They won’t know until they turn the machine on how the products will be.”
Chief Executive Officer Mark Fields, 53, who took over July 1 when Alan Mulally, 68, retired, said yesterday that the F-150 and Ford’s other new-model introductions are on track and will boost earnings next year. Ford said it will have $7.5 billion in capital expenditures this year, including the new model introductions.
“The payoff in the 2014 launches and investment will be a strong product lineup with higher volumes, revenues and margins in 2015 and beyond,” Fields said on the call with analysts.
Fields said he is continuing and “accelerating” the policies of his predecessor, such as globalizing products and focusing on fuel-efficiency. Ford earned $42.3 billion in the last five years after losing $30.1 billion from 2006 to 2008.
“The indication that there has to be a new strategy because there is a new person sitting in the chair, I wouldn’t necessarily assume that,” Fields said. “That message of continuity and acceleration resonates.”
Ford rose 0.1 percent to $17.85 at 9:37 a.m. in New York. The shares had gained 16 percent this year before today. General Motors Co. dropped 2.1 percent to $34.99 after the Detroit-based company reported a second-quarter profit yesterday of 58 cents a share that missed analysts’ estimates by 1 cent a share.
“Mulally created a new attitude that was bought into by the succeeding generation of management,” said Bernie McGinn, CEO of McGinn Investment Management in Alexandria, Virginia, which holds about 400,000 Ford shares.“Part of that is you never stop innovating.”
In Europe, where Ford said it would return to profitability next year, it reported a $14 million pretax profit in the second quarter from a loss of $348 million last year. The automaker’s sales in Europe are up 6.6 percent this year as industrywide deliveries rose for the 10th consecutive month in June.
“We expect a positive reaction to this strong set of results, particularly the surprise profit in Europe, something investors place outsized importance upon,” wrote Ryan Brinkman, an analyst at JPMorgan Chase & Co., who rates the shares the equivalent of buy.
In Russia, where political upheaval from the uprising in Ukraine has pressured the ruble and depressed car sales, Ford said it wrote down its entire $329 million investment in its joint venture with Sollers. The automaker still sees its European operations, which include Russia, returning to a profit next year after losing $1.6 billion there in 2013.
“We don’t see issues in Russia affecting our ability to reach profitability in 2015,” Fields said. “The current environment is difficult, but it’s a big, important market and it has the potential to be the largest market in Europe.”
In North America, Ford had an operating profit margin of 11.6 percent, up from 10.6 percent last year, which Shanks said was “pretty spectacular.”
Ford benefited from a break in the cost of new model debuts in the second quarter, as the pace of introductions slowed temporarily. The F-150, for example, was in full production in the second quarter, after being down for three weeks in the first quarter.
“They have a bulge of launches behind them and there’s a bulge of launches ahead of them,” Jonas said. “They’re kind of in the eye of the storm.”
In South America, the automaker reported a pretax loss of $295 million compared with a pretax profit of $151 million a year earlier. Ford said it now expects an even bigger loss in the region than it previously forecast. On April 25, the company had said losses there this year would exceed the $34 million it lost there in 2013.
“This is looking a bit worse in terms of what we had expected,” Shanks said of South America. “That’s still a region where there are lots of challenges we have to work through.”
The company also said it expects improved earnings from its Ford Credit financial operation, up from a prior prediction that the lending unit’s earnings would be equal to or better than last year.
In Ford’s Asia-Pacific region, pretax earnings were a record $159 million. Ford sales in China surged 35 percent in the first half of the year, as it sold a record 549,256 vehicles on strong demand for its Kuga and EcoSport sport-utility vehicles and Focus and Mondeo sedans.
Ford’s market share in China reached a new high of 4.6 percent in the second quarter. Last year, Ford’s sales in China surpassed Toyota Motor Corp.
“This is a transition year for Ford, a year of investing for much better things in 2015 and 2016,” said David Whiston, an analyst at Morningstar Inc. in Chicago, who rates Ford the equivalent of buy. “In China, Ford is just going gangbusters.”
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