Ford Just Keeps Rolling

More good news from the House of the Blue Oval: Ford (NYSE: F  ) said on Friday that it earned $2.6 billion in the second quarter, a stronger-than-expected result driven by solid performance in all of Ford's global business units.

It was the best single quarter for Ford since 2004 and the company's best first half in over a decade. Ford continues to increase cash on hand ($21.9 billion) and decrease its debt ($27.3 billion) and now expects its cash to exceed its debt by the end of next year.

Great stuff, at least at first glance. But how do things really look under the hood?

Digging into the nuts and bolts
Notwithstanding that still-dramatic debt load, the details look quite solid. That $2.6 billion represented a $338 million increase over year-ago numbers, but Ford-watchers will recall that last year's number reflected a big bag of "special items" like debt shuffling that made things look rosier than they actually were.

But there's no asterisk needed on this quarter's numbers. Things are solid across the board:

  • All four of Ford's global automotive units reported profits, led by a $1.9 billion profit in North America, a $2.8 billion improvement (nope, that's not a typo) from the second quarter of 2009 and a $645 million jump from last quarter. Ford's market share continues to increase around the world;
  • Ford's European arm posted a $322 million profit, an increase of $265 million over last year and up $215 million over the first quarter;
  • Ford Credit, the automaker's captive financing unit, reported a pre-tax operating profit of $888 million, a $242 million improvement over year-ago numbers and a $60 million increase over last quarter's results;
  • Overall "automotive debt" -- Ford-speak for debt not related to its banking operations -- was reduced by $7 billion during the quarter, which will save the company over $470 million a year in interest payments.

Ford clearly continues to execute on its turnaround plan, and once again CEO Alan Mulally and CFO Lewis Booth repeatedly pointed out during the conference call that the company is well ahead of the (aggressive) targets set out in its plan.

So what's driving this success?

The secret to Ford's success
As is so often the case in the auto business, it comes down to the product: Ford's focus on building high quality vehicles and creating the cost structure needed to sell them at competitive prices is paying off. Long story short, Ford is selling more cars and trucks and making more money on each sale.

The profit-per-sale bit is important. Ford has held incentives to a reasonable level and upped margins by adding content -- creating gotta-have options. Options, of course, are where the big profits are in the auto biz, and Ford has made it a priority to create particularly desirable packages on nearly all of its models.

For instance, Ford has put huge resources into high-tech (and high margin) "infotainment" features in recent years, leveraging partnerships with tech giants like Microsoft (Nasdaq: MSFT  ) and Sony (NYSE: SNE  ) to create its SYNC "infotainment" suite. SYNC, which is an elegant combination of audio, communication, smartphone-integration, and navigation features, is available on most Ford models (including entry-level vehicles like the Fiesta) in the U.S., and has proven to be a helpful differentiator in comparisons with key competitors like General Motors, Toyota (NYSE: TM  ) , and Honda (NYSE: HMC  ) .

The outlook
The next two quarters are likely to be somewhat less impressive, if only because of the natural rhythms of Ford's business -- production numbers tend to dip in the third quarter as plants are shut down to switch over to new-model-year tooling, and spending tends to go up in the fourth quarter as those new models are launched and marketed. Neither of those things should be cause for concern on the part of Ford investors.

Other things to watch out for? As Mulally noted in the call, growth is moderating in Asia and spending remains subdued in the U.S. and Europe, all of which will tend to mute results somewhat. On the flip side, commodities prices are likely to rise as the recovery continues to take hold, which will obviously impact Ford's costs. Meanwhile, the company continues to do its thing: Focusing on building good cars and trucks that people want, streamlining costs around the world, and being aggressive (but prudent) in paying down that big pile of debt.

Speaking as a Ford shareholder, that sounds pretty good to me.

More Foolish coverage of the global automotive business:

Fool contributor John Rosevear owns shares of Ford, which is a Motley Fool Stock Advisor selection. Microsoft is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (13)

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 July 23, 2010, at 4:36 PM, MelMac50 wrote:

    It's impressive alright. Their management team is as cohesive and focused as any non-Silicon Valley company I can recall. They continue to under-promise and over-deliver. 3rd quarter should be buoyed by sales of the Fiesta and refreshed Edge. 4th quarter should show some help from the new Explorer. Next year will see a big boost from the stunning new Focus. And even in this business climate they figure they will be debt-free in seventeen months (they've yet to mislead us on a prediction). Success begets success so showroom traffic should keep increasing with every bit of good news. And they are succeeding not only in the U.S. but in every market in which they compete. If they can avoid a debacle like those delaminating tires on the old Explorer then the sky is the limit. With a P/E of less than 8 vs Toyota's 46+ how can this NOT be a long play?

  • Report this Comment On July 23, 2010, at 11:19 PM, baldheadeddork wrote:

    The big news in this report (h/t TMF BreakerRob) was that Ford expects cash to exceed debt by the end of 2011. That's not just saying assets will exceed debt, they're saying they'll have more cash than outstanding debt by the end of next year. That would mean overall assets/debt would be back in the industry range of 3:2, or probably better.

    Just......wow.

    Mulally is getting a ton of much deserved credit, but can we take a minute to recognize that Bill Ford had a huge role in turning this company around during his tenure from 2000-2006?

    And on Monday, Ford is pulling the wraps off its all-new Explorer. Ford has been uncommonly tight lipped about this new model, but their attitude screams that they think its going to be a huge hit.

  • Report this Comment On July 24, 2010, at 8:12 AM, TMFMarlowe wrote:

    @abaldheadeddork: Re the cash exceeding debt, that is indeed the big news. I nearly fell out of my chair when I first read it -- these guys aren't the kind to make predictions like that unless they're really, really sure about them, which tells me that it's possible that they'll hit that milestone sooner than the end of 2011.

    Good, good stuff, top to bottom.

    John

  • Report this Comment On July 26, 2010, at 2:25 PM, plange01 wrote:

    talk all you want about ford but the fact is its massive debt is far to large for it to survive...

  • Report this Comment On July 26, 2010, at 4:07 PM, mDuo13 wrote:

    I'm still hung up on that "$2.8 billion improvement" in profit in North America versus 2009. Mind-blowing.

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