Ford Delivers Strong Profits But Remains Cautious On Outlook

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Ford Motors ( F ) reported another quarter of strong results, helped by robust sales in North America and China, and an improvement in its European operations. Total revenues for the quarter jumped 4% to $37.6 billion while the net income almost doubled to $3.0 billion or 74 cents per share. However, the net income was helped by one-time benefits, to the tune of $1.8 billion. During the quarter, the automaker's global sales rose 5% to 1.6 million units.

We have a $18.66 price estimate for Ford , which is about 15% more than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.

Cautious Outlook

Ford expects its 2014 pre-tax profit to trail the 2013 figure, due to a possible deterioration its margins. This will be a very busy year for Ford as it plans to roll out 16 new or refreshed models in the U.S., including the revamped version of its best selling F-150. Extra cost associated with the changeover of the F-150 is one of the reasons why the automaker is cautious on the 2014 outlook. Ford anticipates its North American operating margins to slide to 8-9% this year, as a result of these extra expenses. There could also be some pressure on its pricing as the company battles opportunistic pricing from the Japanese automakers such as Toyota and Honda. Japanese companies have the cushion to cut the prices of their vehicles now that the yen has devalued more than 25% in the last twelve months.

Ford also expects currency fluctuations in South America to eat into its profits.The Venezuelan Bolivar is slated to decline to 12 bolivars a dollar, from the current level of ~6.3 bolivars a dollar. This can potentially have a negative effect of $350 million on the company's pre-tax earnings. Overall, Ford expects to generate a pre-tax profit of $7-8 billion in 2014, compared to $8.6 billion in 2013.

North America Shows Some Weakness But China Remains Strong

Ford's North American sales remained flat at 0.76 million units in the fourth quarter. Moreover, Ford's operating margins in the region declined 80 basis points to 7.6%, primarily due to lower pricing and higher warranty expenses. For the full year, the company still managed to generate an impressive operating margins of 9.9%. Margins in the fourth quarter are usually lower since auto companies offer higher incentives in order to meet their annual targets. Ford's full year results are impressive but fourth quarter results suggest some weakness in its operations. The first half of 2014 will help assess whether this was a one-time thing or the start of a definitive trend.

In Asia Pacific, Ford earned $106 million during the fourth quarter. For the full year, Ford earned $415 million from the region. Till 2012, the earnings from this region hardly made an impact on the overall income statement. However, a 30% jump in the unit sales has ensured that Asia Pacific cannot be overlooked anymore. Vehicle sales were boosted by the introduction of seven new or refreshed models including the EcoSport, the Kuga, the Fiesta and the Mondeo, which appeal to the value seeking customers in China, India and Indonesia. Going forward, the significance of this region should continue to grow as Ford sells more vehicles in the developing markets of Asia Pacific.

Europe Improves

European operating losses stood at $571 million in the fourth quarter to take the full year tally to $1.6 billion.At the start of 2013, Ford had estimated it could lose as much as $2 billion but the company has done well to contain its losses within its guidance.

Ford had earlier aimed to introduce a total of 15 new or refreshed models in Europe over the next five years, but now plans to raise that figure to 25, starting with the debut of the affordable SUV EcoSport early this year. In addition, the European built Mustang will be introduced this year as well. With a more stable automotive market and new model introductions, Ford expects its operating losses to narrow to $400 million in 2014. Furthermore, the automaker estimates it will turn breakeven in 2015.

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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.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: F , GM , HMC , TM , TSLA

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