Ford Beats but Profits Slump - Analyst Blog

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Ford Motor Co. ( F ) posted a 39% fall in profits of $1.20 billion or 30 cents per share in the second quarter of the year, from $1.98 billion or 49 cents in the corresponding quarter of 2011, due to lower operating results in all regions except North America. However, the company's profits were higher than the Zacks Consensus Estimate of 28 cents per share.

Revenues in the quarter dipped 6% to $33.3 billion, due to the same factors mentioned above. However, it exceeded the Zacks Consensus Estimate of $32.0 billion. In the first half of the year, Ford's U.S. total market share was 15.4% in the U.S. and 8.1% in Europe.

Ford Automotive

The Ford Automotive segment witnessed a 6% drop in revenues to $31.4 billion. Total vehicle wholesaled fell 72 thousand to 1.45 million units from 1.52 million units a year ago. Pre-tax operating profit decreased 39% to $1.38 billion from $2.28 billion a year ago due to lower profits in Europe, South America and Asia Pacific & Africa.

In North America, revenues went up a tad 1% to $19.7 billion. Pre-tax operating profit improved 5% to $2.0 billion from $1.9 billion a year ago, led by higher net pricing, improved contribution costs and other factors, partially offset by higher structural costs and unfavorable volume and mix.

The automaker expects higher profit in the region in 2012 compared with 2011 due to strong product line-up, including the recently launched Escape and to-be-launched Fusion in the second half of the year. The company also remains committed to maintain its competitive cost structure in North America.

In South America, revenues ebbed 21% to $2.3 billion. Pre-tax operating profit plummeted to $5 million from $267 million a year ago, driven by lower volume, higher costs and unfavorable exchange.

The automaker expects the regions to be profitable in 2012 but at a lower level compared with 2011, due to strong competition, weak currencies and changes in government policies affecting areas such as trade and access to foreign currency.

In Europe, revenues slid 21% to $7.1 billion. The region had a pre-tax operating loss of $404 million, in stark contrast to a profit of $176 million a year ago, driven by decreases in both volume and pricing as well as higher contribution costs. Due to the challenging market conditions, Ford expects a loss of more than $1 billion in 2012 in Europe.

In Asia-Pacific & Africa, revenues grew 9.5% to $2.3 billion. However, the region had an operating loss of $66 million compared with a profit of $1 million a year ago due to higher costs associated with new products and investments to support higher volumes and future growth, apart from other factors.

Nevertheless, the company expects results to improve in the second half of the year driven by favorable volume and mix, as the company will benefit from enhanced capacity in China and Thailand and the launch of all-new Focus and Ranger.

Ford's Other Automotive - consisting primarily of interest and financing-related costs - revealed a broader pre-tax loss of $163 million compared with $76 million a year ago. The loss was attributable to net interest expense and an unfavorable adjustment in fair market value, primarily from the company's investment in Mazda.

Financial Services

Revenues in the Financial Services segment fell 5% to $1.9 billion from $2.0 billion a year ago. Ford Credit reported a 27% decrease in pre-tax operating profit to $438 million from $604 million due to fewer lease terminations, which resulted in fewer vehicles sold at a gain, as well as lower financing margin.

This resulted in a 26% fall in pre-tax operating profit in the overall segment to $447 million from $602 million a year ago. Ford Credit continues to expect pre-tax profit of $1.5 billion for 2012.

Financial Position

Ford had cash and marketable securities of $23.8 billion as of June 30, 2012, an improvement from $22.0 billion as of June 30, 2011. However, Automotive debt rose to $14.2 billion as of June 30, 2012 from $13.7 billion as of March 31, 2012 due to additional drawdowns of low-cost loans for the development of advanced vehicle technologies. The company will make its last draw on these loans by August 2012, while its repayment will begin in September this year.

In the first half of 2012, the company's cash flow from continuing operations more than halved to $2.6 billion from $5.7 billion in the year-ago period. Capital expenditures increased to $2.3 billion from $2.0 billion a year ago.

Guidance
    
For the full year, Ford continues to expect industry volume in the range of 14.5 million-15.0 million vehicles for the U.S. and about 14 million units for the 19 European markets covered by the automaker.

Ford anticipates market share in the U.S. and Europe to be lower than 16.5% and 8.3%, respectively in 2011. It also expects the overall pre-tax operating profit to be lower than 2011 compared with the prior guidance of tallying. Operating margin in the Automotive segment is anticipated to be equal or lower rather then the prior guidance of improve over 5.4% in 2011.

Ford reiterated its guidance of Automotive structural costs to increase by less than $2 billion in 2012 in order to support higher volumes, new product launches and global growth plans. The automaker now expects capital expenditures of $5 billion compared with the prior guidance of $5.5 billion-$6.0 billion in 2012. It expects to meet challenges in Europe and South America by executing its One Ford plan.

Our Take

Despite the One Ford strategy, we are concerned about the economic weakness in the world as well as higher structural costs. This along with the depressing results led the company to retain a Zacks #4 Rank on its stock, which translates to a short-term (1 to 3 months) rating of Sell.

Ford's archrival, General Motors Company ( GM ) is expected to release its first quarter results on August 2, 2012.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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