Ford's Profit: For Real This Time?

Surprising most of Wall Street, Ford (NYSE: F  ) turned a profit for the third quarter. A real profit.

Yes, venerable Ford, the only one of the Once-Big Three automakers to avoid bankruptcy in the last year, the company given up for dead by those same Wall Street analysts as recently as eight or nine months ago, posted a fat upside surprise net profit of almost a billion dollars on Monday morning. To be precise, $997 million, or $0.29 a share.

That's real money.

Unlike last quarter's surprise profit, this one wasn't made up of "special items" like credits from debt restructuring. This one's legit: Pre-tax operating profit was $1.1 billion. Better still, while Ford's financial-services unit continues to be a major profit center, $446 million came from the car business.

Ford divides its world into four regions -- North America, South America, Europe, and Asia Pacific -- and the car and truck businesses in all four showed positive results. That's the company's first quarterly operating profit in North America since 2005.

Ford's making real money from building and selling cars and trucks. It's impressive evidence that Ford's long-shot turnaround plan is working.

Isn't it?

Yeah, but …
I'll admit that I have a few qualms. And just so we're real clear on this, I'm a Ford shareholder. Nobody wants to see a spectacular Ford recovery more than I do. But:

  • Cash for Clunkers is over. Did the government program, which ended in August, create an unsustainable spike in sales, juicing these numbers?
  • Consumer spending is falling again. The overall spending numbers fell in September, and auto sales fell with them. Worse, unemployment's still high, which means spending is likely to be low for awhile -- families with an unemployed member don't tend to buy TVs and iPods, much less new cars and trucks.
  • The UAW isn't being helpful. The union is expected to reject a deal that would put Ford's U.S. labor contract on a roughly equal footing with those of post-bankruptcy General Motors and Chrysler, and closer to the arrangements in place at Toyota (NYSE: TM  ) , Honda (NYSE: HMC  ) , and Nissan's U.S. facilities. This could leave Ford at an ongoing competitive disadvantage.

These are all legitimate concerns. But I don't think any one of them is likely to derail Ford's recovery. While we may not have seen an end to money-losing quarters, Ford's mortgage-the-company recovery plan seems to be working better than just about anyone expected. The automaker should get through next year's economic bumps without too much trouble. 

Ford itself is very clear on the near-term challenges, saying that while it now expects to be "solidly profitable" in 2011, what will happen between here and there is hard to predict. I'd say that's fair.

On the other hand …
There may be challenges ahead, but Ford does have some big things going for it right now:

  • Ford management rocks like a rocking thing. CEO Alan Mulally, recruited from Boeing (NYSE: BA  ) by the Ford family and charged with saving the company, has … well, he's just gone out and saved it, more effectively than anyone could have predicted. He was my nominee for Best CEO of 2008, and I expect he'll do even better in this year's ranking.
  • Product, product, product. Buying decisions in the car business are often as much about romance as about things like practicality and value. Product is extremely important. Ford's products are winning rave reviews, even in places like Consumer Reports, not traditionally an American-auto cheerleader. And unlike some of its competitors (read: Chrysler), its near-term product pipeline looks very strong. If the upcoming Fiesta isn't a smash hit in the U.S., I'll be stunned.
  • The Canadian Auto Workers are on board. Unlike their U.S. counterparts, the CAW has been willing to make further concessions. The union -- which represents 7,000 members of Ford's North American workforce -- readily approved a deal to freeze wages until 2012 and close an assembly plant, giving the company significant savings and stability on a key front.
  • Supplier drama is a fading concern. Key Tier 1 auto suppliers like Johnson Controls (NYSE: JCI  ) and Federal-Mogul (Nasdaq: FDML  ) are weathering the economic storm better than many predicted. In fact, Johnson Controls reported a happy earnings surprise of its own just last week, and worries about supply disruptions are fading across the board.

Long story short, I'd say that today's news shows that Ford's turnaround is on very solid ground and ahead of even the most optimistic predictions -- though challenges remain, and 2010 could be a bumpy ride.

That said, whether the stock is a buy at current prices is a more complicated question, one I'll ponder in detail sometime in the next couple of days. What do you think? Let's hash this out -- scroll down to leave a comment and let me know your thoughts.

Fool contributor John Rosevear owns Ford preferred shares. The Motley Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2009, at 3:47 PM, Optimyst wrote:

    It's so refreshing to see a geniunely positive article about Ford from you guys. Those are usually few and very far between.

    Ford's momentum has really just begun, and it's finally starting to sink in - Bravo! No get that CAPS rating up where it belongs!

  • Report this Comment On November 02, 2009, at 4:10 PM, TMFThump wrote:

    Let's get the disclosure end of this out of the way. I have a stake in Ford's success on more than one front.

    Alan Mulally has been a huge part of Ford's resurgence. He negotiated new loan agreements prior to the credit crisis when cash was available. Whether his decisiveness was good planning or good fortune, it stands in contrast to GM's actions, who did not address liquidity problems before it became a crisis. Secondly, he injected a vision and focus on the Ford brand that is understood and embraced within the company. Mulally also added a level of accountability that hasn't been seen at Ford in quite some time.

    That said, the long term success of Ford will be defined less by that than it is its products. A great deal of progress has been made on the quality front. This has been going on for a few years, but it takes a while for those old perceptions to be overcome. A couple of J.D. Power surveys don't change people's minds. It has to be driven home consistently on multiple fronts. The Consumer's Reports ratings are starting to reinforce what the company has been contending for awhile about quality.

    One of the things Ford's management has learned over the last few years is that you can't rely solely on trucks and large vehicles to drive your profits. 2010 will see some great small cars from Ford hitting the market. They have been using some innovative marketing to bring brand recognition to the Fiesta before it ever arrives at dealers. It will begin arriving a dealers late in the first quarter and become an instant hit. A new Focus will follow it, and could become an even bigger story.

    The cloud on the horizon is debt -- $35B of it. If the economy doesn't pick up and US vehicle sales don't return to something closer to pre-recession levels, it's going to take awhile longer. Ford didn't have Uncle Sam helping write down its debt. If the US car market returns to sales volumes close to 15M, Ford will be well positioned pay it down.

  • Report this Comment On November 02, 2009, at 4:54 PM, ezreider wrote:

    I've got a large stake in Ford too but I'm not betting on results like this recurring in the near future. While I have not seen their financial reports, I believe that their profits were generated more by Ford Financial than by new vehicle sales or "cash for clunkers". If I'm correct, better than 60% of their $1B profit came from resale of their turned in lease cars through the auctions that brought higher than anticipated prices. Those prices have now stabilized and unless Ford is booking unrealistically low prices for thier used inventory over the next quarter I would expect some real disappointments in the next quarter.

  • Report this Comment On November 02, 2009, at 4:57 PM, JustMee01 wrote:

    You forgot to mention a few other items:

    Improving margins YonY

    Improving transaction pricing YonY

    Improved net profit on decreased revenue YoverY

    Increased market share in North America and Europe

    And all of this came with currency headwinds that negatively impacted earnings in both NA and Europe (the Canadian dollar vs. US dollar in NA, and the Pound and Russian Ruble versus the Euro in Europe). All in all a solid quarter...

    Lots more work to do, but Mulally isn't finished yet. He's got more up his sleeve.

  • Report this Comment On November 02, 2009, at 5:21 PM, Milligram46 wrote:

    Lets also not forget that Toyota as of late hasn't been able to do much of anything right. When you consider the Ford Explorer roll over issues were little more than a decade away, and Ford basically bet the far pre-market crash, they have come an incredible distance in a short period of time.

    I had the pleasure of driving a Ford Fusion SEL V6 last year and was absolutely blown away by what a great car it is.

    With Chrysler reduced to a division of Fiat, GM still getting back on track (but with a rapidly improving product line), Toyota having a huge number of problems that won't go away quickly, Ford right now is in the catbird seat.

  • Report this Comment On November 02, 2009, at 5:48 PM, crm14210 wrote:

    Over the long-term, I'm looking for history to repeat itself.

    Some years ago the US steel industry was in a similar position as the US auto industry is in today - bad management, high operating costs, poor quality, shrinking markets, etc, etc. Steel, like the auto companies, was able to reduce costs and restructure their businesses. Today, US steel companies, notwithstanding weak demand, are as strong as ever and can effectively compete in the global markets.

    I truly hope that the new leaders of our once great auto companies will embrace this magnificant opportunity they have been given to reengergize their entrpreunial spirit and build new world class automobiles. Over the L-T, a car is a durable product and will need to be replaced. The American market is still very large and demand will slowly increase so if you build a world class product we will buy it.

  • Report this Comment On November 02, 2009, at 6:11 PM, TMFMarlowe wrote:

    JustMee01, I didn't forget any of that... the Fool only gives me 800 words at a time and I didn't have enough space to say all that I might like to have said. But no worries -- I'll be writing another article on Ford later this week.

    Thanks for reading.

    John Rosevear

  • Report this Comment On November 02, 2009, at 6:13 PM, davejh23 wrote:

    "If the US car market returns to sales volumes close to 15M, Ford will be well positioned pay it down."

    That's a big "if". Sales volumes might not reach 15M again for years. They're going to need to learn to manage that debt on volume closer to 10-12M if they're going to survive. They need to rid themselves of the UAW altogether.

  • Report this Comment On November 02, 2009, at 7:55 PM, modeltim wrote:

    Mulally's a genius, of that I am sure but I wouldn't buy over $5 a share. The auto business is still a lousy business to be in and will be for years to come.

  • Report this Comment On November 02, 2009, at 8:14 PM, Intlinvstr4life wrote:

    Almost as good as a 'told you so.'

    Smart, old-fashioned, business fundamentals are what this country needs right now. I hope other sectors will recognize why Ford is growing amidst the turmoil and emulate. This kind of healthy growth inevitably leads to employment growth on the national level, and boom, we're back on our feet.

    And since they refused aid one can see that, quite literally, government had nothing to do with it.

  • Report this Comment On November 02, 2009, at 8:51 PM, porchguy wrote:

    Also, Ford was upgraded in its bond rating today, so that lets it have access to more cash if it should need it next year.

    Finally, an automaker being upgraded instead of downgraded.

    As far as the Ford UAW workers in the US turning down the latest in concessions, I wouldn't worry about it. They are on the home front and know what's going on with the company. They see first hand the amount of cars they are making. I'm possitive if they would see a downturn in their production schedules that they would be the first to give some more concessions.

    The UAW has been coming thru with concessions since 1982, I ought to know. That is when we started giving them at the auto parts supplier that I worked for started.

  • Report this Comment On November 02, 2009, at 8:55 PM, Buckeye46 wrote:

    As a Ford shareholder, i am encouraged by their leading edge lineup. Innovative, forward thinking, will win the day. But... the union factor is the weak link in Fords' future success. By not folding like GM and Chrysler, the uaw will most likely target Ford, at the orders of the obama gang and seek to weaken it and bring it under the union and government thumb. Harsh but a reality.

  • Report this Comment On November 02, 2009, at 11:03 PM, JustMee01 wrote:

    "The Canadian Auto Workers are on board. Unlike their U.S. counterparts, the CAW has been willing to make further concessions. The union -- which represents 7,000 members of Ford's North American workforce -- readily approved a deal to freeze wages until 2012 and close an assembly plant, giving the company significant savings and stability on a key front."

    This wasn't immediately obvious to me either, I'll admit. But it came up on the Ford board, and after fact checking, I believe it's accurate.

    The portrayal of the UAW as recalcitrant and the CAW as willing to negotiate is actually backwards.

    The UAW rejected <B>further</B> concessions. The CAW had refused concessions that the UAW has already agreed to. The recent vote by the CAW meerly catches them up with what the UAW has already conceded. The CAW was actually holding out on the original deal that the UAW ratified months ago. So, the image of labor strife in the US vs, peace up north isn't quite accurate.

  • Report this Comment On November 03, 2009, at 2:32 AM, ET69 wrote:

    To Buckeye 46...what are you smokin...or do you just need a mental enema? Let me see if I've got this straight. The 'Obama Gang' ,(sic) has a conspiracy to use the unions to bust Ford into bankruptcy so .....who can control it? God you really should drink something other than sterno at night...try...beer at least!

  • Report this Comment On November 03, 2009, at 7:57 AM, TMFMarlowe wrote:

    Bankruptcy at GM and Chrysler hasn't worked out too well for the UAW. They've still got a lot more going for them at Ford as-is. Those who see a conspiracy to drive Ford into bankruptcy to somehow benefit the UAW have it a bit backwards, I think.

    Thanks for reading.

    John Rosevear

  • Report this Comment On November 03, 2009, at 1:00 PM, cowquack wrote:

    Not paying you to ask what I think, I am paying you, as an expert, to tell ME what YOU think! Doc

  • Report this Comment On November 03, 2009, at 6:35 PM, BigOlDave wrote:

    Buckeye got it 100% right: if it wasn't for the fact that Ford sleeps with the UAW (an as-yet unburied corpse of yesteryear), this might be an interesting investment. Until the employees themselves get smart and vote to work tirelessly with management to get themselves out of the ditch, there will be no U. S. jobs at Ford for their grandchildren. Hopefully, they will go to Canada to work, rather than Mexico or Singapore.

    I think the recent pop in price represents a good opportunity to cash out and consider a company that actually owns some stuff. The only reason Ford didn't panhandle the government for operating cash is that it sold almost all its facilities. Now they just lease them. The only reason any manufacturer would do that is because they want the option during their long-term planning to walk away from the place. Only in the U.S. -- and chiefly where there's union baggage to schlep -- would factory owners want/need such an option.

    Americans aren't getting smart fast enough to make our own stuff anymore.

  • Report this Comment On November 05, 2009, at 7:33 AM, rick1427 wrote:

    One issue that is still outstanding is the UAW rejecting the new proposed contract. Thus giving consesions.

    Obviously this will help Ford become more profitable, but will this help the eccomony. Reducing the money into the pocket of the labor force will reduce the money that goes into the market. Unless the labor force is hiding all their cash under their bed.

    So why don't we have Toyota, BMW, Hundai, Honda, and the rest of the "transplants" increase their wages, thus pumping more money into the us ecconomy?

    We seem to be content to give away Billions of dollars of tax payers money for bank support, insurance support, etc, but that is only addressing a problem that was caused by mismanagement of those industries.

    There are some that will say, "Toyota show a loss last year". Well i worked for a transplant for a while, and that company would increas the price of the transmissions and motors, that they were importing from another country, from a company that was in bed with them. This showed a loss in the US, therfore they paid little or no taxes on them, but in Japan they showed a profit. They also spent a ton of money in Product development, that is all done in Japan.

    I am sure that we will continue to have the state governments give away land, taxes, water, etc to these companies so they will build in their states. And yes they will employ some people in their states, but the big profit centers are in other countrys.

    As far as union concesssion from the UAW goes, Ford can move its manufacturing locations to Canada, Mexico, China, Thailand, etc. In fact they just announced last month that a new plant was being built in China. (number 3)

    Ford is going to do ok, and the holders of the Ford Stock will do ok, but the American taxpayers may want to look at the big picture.

  • Report this Comment On November 10, 2009, at 9:41 PM, Beginner110 wrote:

    I drove Chrysler products for over 35 years and have driven Ford for over 25 years now. I have more confidence in my Ford that I do in Chrysler. While GM may produce good productsthose from Ford are better built and SERVICED. Check out the service ratings. That is what creates repeat customers. Ford stock should be a good long term investment beating the averages and the other auto manufactureres. Numbers will tell a story, but customer service drowns out the number story.

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