Ford Disappoints, Europe & Asia Lags - Analyst Blog

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Ford Motor Co. ( F ) has disappointed by posting a sharp 20% fall in profits to $1.6 billion in the first quarter of the year from $2.0 billion in the same quarter of 2011. Including special items, the decline in profits were much more pronounced. It was 45% to $1.4 billion from $2.6 billion a year ago.

On per share basis, profits ebbed 17% to 39 cents from 47 cents in the first quarter of 2011. Nevertheless, it was higher than the Zacks Consensus Estimate of 35 cents.

The automaker has attributed the decrease in profits to higher tax expense, lower operating results and higher charges emanating from buyouts of hourly workers in the U.S. as part of its United Auto Workers (UAW) agreement in 2011.

The company's profits drastically fell in all its operating regions, except North America. In fact, it recorded a loss in Europe and Asia Pacific Africa compared with a profit in the comparable quarter of 2011.

Total revenue in the quarter slipped 2% to $32.4 billion, barely surpassing the Zacks Consensus Estimate of $32.0 billion. The fall in revenues was attributable to lower wholesale volumes in Europe and Asia, partially offset by higher volumes in North America and South America.

Ford Automotive                    

Revenues in the segment dipped 2% to $30.5 billion on lower unit sales. The wholesale volumes declined 45,000 units to 1.4 million units during the quarter. Pre-tax operating profit sagged 14% to $1.8 billion on the back of higher costs and unfavorable exchange rates, partially offset by higher net pricing and lower net interest expense.

In North America , revenues increased 4% to $18.6 billion on higher volumes. Pre-tax operating profit rose 17% to its 12-year high at $2.1 billion from $1.8 billion a year ago driven by increases in industry volume and net pricing and decreases in contribution costs and compensation. These were partially offset by higher structural costs. Unit sales grew 6% to 651,000 vehicles during the quarter.

In South America , revenues scaled up 4% to $2.4 billion. However, pre-tax operating profit in the region slashed 74% to $54 million from $210 million in the first quarter of 2011. The decrease reflected higher costs (mainly contribution costs) and unfavorable exchange rates. Unit sales rose 3.5% to 118,000 vehicles during the quarter.

In Europe , revenues shrank 17% to $7.2 billion. The region had an operating loss of $149 million in sharp contrast to a profit of $293 million in the prior year. The drastic fall was attributable to fall in industry volumes, lower demand for parts and accessories, adjustments of dealer stocks to lower industry demand and increases in contribution and pension-related cost, partially offset by reductions in other structural costs. Unit sales slid 14% to 372,000 vehicles during the quarter.

In Asia-Pacific & Africa , revenues escalated 9.5% to $2.3 billion. However, the region had a pre-tax operating loss of $95 million compared with a profit of $33 million in the year-earlier quarter due to higher costs associated with continued investment in the region and slower-than-planned launch of the new global Ranger pickup truck from the company's plants in Thailand and South Africa.

Ford's Other Automotive - consisting primarily of interest and financing-related costs - showed a narrower pre-tax loss of $106 million in the quarter compared with $249 million in the prior year-quarter. The improvement was attributable to lower net interest expense related to the company's debt reduction measures in 2011 and non-recurrence of market valuation losses associated with its investment in Japan's Mazda Motor.

Financial Services

Ford's Financial Services segment also depicted gloomy results during the quarter. The segment reported a pre-tax operating profit of $456 million, which is a sharp 35% decline from $706 million in the previous year-quarter. Ford Credit registered a steep 37% drop in pre-tax operating profit to $452 million from $713 million a year ago. The decline was a fall out of fewer lease terminations, which resulted in fewer vehicles sold at a gain.

Financial Position

Ford had cash and marketable securities of $23.1 billion as of March 31, 2012, up from $21.4 billion as of March 31, 2011. Automotive gross cash was $23.0 billion as of March 31, 2012 compared with $21.3 billion as of March 31, 2011.

However, the company improved its debt position during the quarter. Its Automotive debt has been reduced by $2.9 billion to $13.7 billion as of March 31, 2012 from $16.6 billion as of March 31, 2011.

In the quarter, the company's Automotive operating-related cash flow deteriorated significantly to $900 million from $2.2 billion in the first quarter of 2011. Meanwhile, capital expenditures enhanced to $1.1 billion from $900 million in the prior-year quarter.

2012 Outlook

For full year 2012, Ford upgraded its industry volume (including medium and heavy trucks) guidance for the U.S. while toning down the same for Europe. The company expects industry volume in the range of 14.5 million-15.0 million vehicles for the U.S. compared with the earlier guidance of 13.5 million units-14.5 million units; and about 14 million units for the 19 European markets covered by the automaker compared with the prior guidance of 14.0 million units-15.0 million units.

Ford anticipates pre-tax operating profit to be about the same as in 2011. The company expects pre-tax profit in the second half of the year to be slightly higher than the first half, driven by product launches and capacity adjustments.

The company expects Automotive pre-tax operating profit to improve from 2011 driven by improvements in Europe, South America and Asia Pacific Africa. It foresees North America and South America to be solidly profitable in 2012. It also expects Asia Pacific Africa to be profitable during the year, despite reporting a loss in the quarter under study. However, it continues to anticipate Europe to incur a loss between $500 million and $600 million for the full year.

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. Despite an expected increase in commodity costs, operating margin in the Automotive segment is anticipated to improve from 2011.

The automaker continues to expect capital expenditures between $5.5 billion and $6.0 billion in 2012 as it pursues investment under product and growth plans.

Our Take

We appreciate Ford's product plans and debt reduction strategy. However, we are concerned about the economic weakness in Europe as well as higher structural and commodity costs.

As a result, the company retains a Zacks #3 Rank on its stock, which translates to a short-term (1 to 3 months) rating of Hold. Consequently, we reiterate our long-term recommendation of Neutral for the long term (more than 6 months).

Ford's archrival, General Motors Company ( GM ) is expected to release its first quarter results on May 3, 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.



This article appears in: Investing , Business , Stocks

Referenced Stocks: F , GM

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