Ford's Earnings To Get A Lift From American And Chinese Operations; Europe Could Improve

By Trefis Team,

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Ford Motors ( F ) is scheduled to announce its Q3 earnings on October 24. It has been an excellent year for the Dearborn based automaker as shares of the company have gained more than 30% year-to-date, helped by a solid set of numbers announced in the previous two earnings release. Ford's profits have been boosted by a strong demand for vehicle's in North America and China. Furthermore, the European losses in the first two quarters have been lower than expected.

Here are some of the trends to watch out for in the upcoming earnings:

We have a $17 price estimate for Ford , which is in line with the current market price.

American Margins To Remain Steady

Ford's sales in the U.S. are up 12% through September, helped by a 20% jump in the sales of the F-Series pickups. Since Ford continues to sell its pickups and SUVs at a brisk pace, its margins should remain strong in the third quarter as well. The bulkier vehicles are generally more profitable than compact cars and mainstream sedans.

In the second quarter, Ford's North American operating margins widened to 10.4% from 10.2% in the second quarter of 2012. The North American margins have consistently exceeded 10% in the last couple of years. Anything above 10% is considered exceptional in the automotive industry.

In the near term, Ford could gain some market share due to a strong demand for pickups.The housing market, for the large part of the year, has been relatively solid which has resulted in strong pickup sales. American automakers have traditionally dominated this category so they stand to benefit more from a strong demand for pickups. However, once the sales of pickups plateau, it will be difficult for Ford to gain further market share.

European Operations Show Signs Of Improvement

The macroeconomic conditions in Europe are still very weak. Automotive sales are down 4% through September on a year-over-year basis.Automakers are crippled with overcapacity issues in Europe with experts estimating a total overcapacity of 4 million units in the region. Ford is in the process of shutting down three plants in the region which will see its workforce shrink by 6,200 employees.

Ford has lost more than $800 million in Europe in the first half of the year but even this is seen as an improvement. In 2012, the automaker lost $1.8 billion and the company's initial estimates were putting the losses in 2013 at $2 billion. However, going by the current rate, it seems likely that the automaker will restrict the losses to within $2 billion.

See our complete analysis for Ford Motors here

Ford aims to become profitable in Europe by the mid-decade. The automaker has already debuted eight out of the fifteen new vehicles promised as part of its turnaround plan. In fact, the company's sales in the last couple of months might be a harbinger of better things to come. Better than expected sales combined with cost cutting measures could result in further improvements in Ford's European operations in the third quarter.

Chinese Momentum Continues

Ford's dream run in China continues with unit sales surging 61% in September. In the first three quarters of the year, Ford's sales are up 51% compared to the previous year figure.

New and refreshed vehicles including the Kuga, the EcoSport, the Edge and the Explorer appeal to value seeking Chinese customers. Ford intends to introduce a total of 15 new vehicles by 2015. The automaker is ramping up the number of dealers across the country and will raise the production level to 1.2 million units in the next two to three years. In fact, Ford is so bullish on China that it expects 40% of the unit sales to come from the country by the end of the decade.

Till the first quarter of 2013, Ford barely managed to breakeven in the Asia Pacific region. However, this should not be considered as a cause for concern. It is quite common in the automotive industry for the companies to struggle to post profits during the initial years of operations since some of the one time investments are treated as operational costs. As the automaker consolidates in Asia Pacific, its profitability will increase. In fact, in the second quarter, the operating profits swelled to $177 million (operating margins ~5.8 %) in the region. We could see some further improvement in the margins as the company's operations become bigger.

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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 Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Stocks: F , GM , HMC , TM , TSLA

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