Ford Warns as Europe Gets Worse

It turns out that Ford (NYSE: F  ) isn't immune to the European flu after all: While the company's losses in Europe have so far been modest, Ford CFO Bob Shanks told The New York Times on Thursday that the Blue Oval expects its total international losses to triple in the second quarter, mostly due to ongoing problems in Europe.

Ford lost about $190 million on its operations outside North America in the first quarter, so Shanks' remark suggests a loss near $600 million, enough to take a big bite out of the quarter's profits.

That's tough news. Mr. Market certainly didn't like it, with Ford stock down over 4% on a day when most stocks were up. Is it really time to worry about the Blue Oval?

Riding out a worsening storm
The answer to that isn't simple. Ford's not in any danger of losing money as long as auto sales in the U.S. continue to be decent, but its profits are likely to be slimmed down until things pick up overseas. Ford filed an 8-K with the SEC late Thursday, shortly after Shanks' remarks appeared in the Times. In that filing, Ford laid out its guidance, and while it's not exactly awful, it's definitely not pretty:

  • Profitable, but not like last year. "[W]e expect the Company to be profitable ... but we expect pre-tax operating profits excluding special items to be substantially lower than the same period a year ago." Ford earned $2.4 billion in the second quarter of 2011, as strong demand helped offset high commodity costs. That was down a bit from $2.6 billion in the second quarter of 2010, but clearly Ford expects this year-over-year drop to be considerably worse.
  • North America continues to be strong. CEO Alan Mulally often refers to Ford's North America division, and specifically the U.S. market, as Ford's "engine," and it should continue to be strong. While Ford's market share may have slipped a bit in recent months, the company expects "good results" from North America and from Ford Credit, its financing arm.
  • New pressures in South America. South America isn't a huge contributor to Ford's bottom line, relatively speaking, but it is significant, and pressures there are growing. Ford said that "growing competitive and pricing pressures" as well as weakening currencies and shifting regulations are to blame.
  • Continuing investment in Asia. Simply put, Ford's spending big bucks to expand its facilities in China, and it won't realize gains on those investments for a couple of years yet. That's not new and it's not a bad thing, but it will weigh on profits for the next several quarters.

And last but certainly not least, Europe's a mess.

A specter is haunting Europe
The specter of imminent economic crisis has done a number on auto sales throughout much of Europe. Automakers from mighty Volkswagen (NASDAQOTH: VLKAY.PK) to smaller producers like PSA Peugeot Citroen (NASDAQOTH: PEUGY.PK) have been hit hard by slumping sales and pricing pressures. General Motors' (NYSE: GM  ) German subsidiary, Adam Opel, is facing a massive restructuring that will likely include a couple of plant closings -- a shocking prospect in labor-friendly Western Europe -- and other automakers will probably follow suit.

Until recently, Ford had largely escaped heavy losses in Europe, thanks to its streamlined, globalized product portfolio and disciplined cost controls. But that's now changing. A big drop in demand combined with an industrywide problem of too much production capacity has clobbered sales, and crushed margins, as Ford has been forced to respond to others' heavy discounting to keep sales going.

"As a result," Ford said in its filing, "we have experienced a decline in margins in Europe and expect this pressure to continue for the foreseeable future." In other words, it's ugly, and it's going to be ugly for a while.

So is it time to worry?
Ford reiterated yesterday that it expects to be "solidly profitable" and to generate positive cash flow for the full year, but noted that that is due to the expected strong performance of North America and the financing unit.

So to answer the question of whether it's time to worry, I'd say "not quite yet." Ford stock is still undervalued relative to its historical multiple, and it might get cheaper still in the coming weeks and months, but this is an exceptionally well-managed, financially solid business that is positioning itself for good growth in emerging markets later in the decade.

Although much depends on the global economy, I still think that investors who hold here -- or who buy here -- are likely to be well-rewarded in the next two to three years. I have no plans to sell my own Ford shares, and unless Ford stumbles in a big way or the U.S. auto market starts deteriorating, I don't see that changing anytime soon.

Despite its recent Europe struggles, Ford has been performing incredibly well as a company over the past few years. It's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But despite this, Ford's stock price is down 28% over the past year. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Get instant access to this premium report. Or, if you'd rather take a look at a high-growth company outside the cyclical manufacturing sector, check out our special free report "The Motley Fool's Top Stock for 2012," which features a company our chief investment officer uncovered that's revolutionizing commerce in Latin America.

Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (7)

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 June 29, 2012, at 2:16 PM, dockofthebay wrote:

    I don't think that there are hidden risks - they are out there in the open.

    North America is Ford's engine, but the company is losing market share here, isn't it? Ford doesn't think that market share is all that important, but I do. Europe could be a money loser for years to come and the big investment in China may never yield a profit. I have very little confidence in the China venture. One more piece of bad news and I am giving up and selling my shares in Ford for a loss.

  • Report this Comment On June 30, 2012, at 11:41 AM, Sparticus501 wrote:

    Ford is still profitable, depite losses in Europe. They did not take bailout money with a great CEO. Any shareprice under $10 is a bargain.

  • Report this Comment On July 01, 2012, at 2:02 AM, Intrepidation wrote:

    Market cap of 36 billion with pension liabilities of 74 billion. That's some heavy lifting.

  • Report this Comment On July 02, 2012, at 8:45 AM, TMFMarlowe wrote:

    Intrepidation, Ford's unfunded pension liabilities aren't anywhere near $74 billion. The number was $15.4 billion as of the end of 2011, and it might be lower now.

    John Rosevear

  • Report this Comment On July 02, 2012, at 5:35 PM, Intrepidation wrote:

    Marlowe,

    I wasn't referring to unfunded liabilities. Overall pension liabilities are approximately 72 billion; 49 billion US, the remainder international. It's grown 50 % since 2000 due to healthcare costs and poor returns. Yes, of that 72 billion, 15 billion is unfunded.

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