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Why Ford Motor Company Thinks South America Will Improve in 2017

Good sales of the Ford Ka, the Blue Oval's smallest sedan, have helped Ford weather economic storms in South America. Image source: Ford Motor Company.

Ford Motor Company (NYSE: F) has had a tough time in South America, where deep recessions in key markets like Brazil and Argentina have led to steep losses. The Blue Oval lost $832 million in South America in 2015 and another $1.11 billion last year.

In the fourth quarter, Ford South America posted a $293 million loss, only slightly better than its year-ago result. But Ford CFO Bob Shanks thinks things might finally be looking up in the region.

Things are bad, but slightly less bad

"What we've been looking at for a whole cycle, which is pretty horrible external economic conditions, are starting to stabilize," Shanks said in an interview on Thursday. "They're still bad, so you can see that the result for the quarter was still pretty much in line with last year, just slightly up."

Image source: Ford Motor Company.

Shanks said that, even though all of Ford's key metrics were still not good, there was reason for optimism.

But the good news is that when you just look at the key metrics, even with just a $2 million improvement in pre-tax results, it's up. It's the first time since the third quarter of 2013 that we've seen improvement.We're also seeing economic factors that we track and look at suggest that, while the turnaround isn't necessarily here, it's probably not far away. Our expectation is that it starts next year, probably more in the second half than in the first half.

Shanks added some additional context during Ford's earnings call.

It is the first time since the third quarter of 2013 that we've seen metrics turning in a positive direction, which is reinforcing our view that the cyclical downturn that we've seen for the last several years is probably bottoming out, coming to an end. Our expectation for next year is that the losses will improve as we see the economic cycle start to turn.

Shanks noted that the pace of auto sales in the region was down, once again, during the period across the entire region, and it was down even more in Brazil, the largest single market in South America.

"But it was the slowest decline, on a quarterly basis, that we've seen throughout the year," he said. "We've seen that [rate of] decline improve on a quarter-to-quarter basis as we've gone throughout the year. So again, another sign of things starting to turn."

Despite the still-tough environment, Ford was able to pick up four-tenths of a point of market share. That was due to strong sales of the tiny Ka sedan and Ranger pickup, both recently revamped models, Shanks said. "And that was in Brazil and all other markets, other than in Argentina."

Image source: Ford Motor Company.

This slide, what Ford calls a "walk," shows how different factors that influence Ford's profit (or loss) in South America varied from the fourth quarter of 2015 to the most recent quarter.

The key takeaway here, Shanks said, is that while Ford has been aggressive in increasing its prices, it hasn't been quite enough to offset the effects of the high local inflation and unfavorable changes in value of the Argentine and Brazilian currencies versus the U.S. dollar.

Ford expects things to improve in South America this year

"We do expect in 2017 the loss to improve for South America as the economic cycle begins to turn," Shanks said on Thursday.

Ford's official guidance isn't very specific. It says that the company expects a better full-year result in South America in 2017 than the $1.11 billion loss it posted in 2016, and that it expects higher sales volumes and better net pricing to help, while exchange rates and rising commodity prices could hurt.

That's not much. But after a couple of years of steep losses, an improvement will be welcomed by Ford shareholders.

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John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy .

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

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

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