Why Ford's Earnings Will Be Down

Ford (NYSE: F  ) is set to report second-quarter earnings this coming Wednesday. What should investors expect?

The good news is that the Blue Oval is likely to report a solid profit, with sales and profits remaining strong in its most important region, North America. The bad news is that profits will almost certainly be down significantly versus last year's numbers -- and the causes of the decline might not be simple to fix.

Why Ford's earnings will be down
Why do I think Ford's profits will be down? Because Ford said so. In an SEC filing last month, Ford laid out its guidance for the second quarter, and it's tough stuff:

  • Profitable, but not like last year. Ford earned $2.4 billion in the second quarter of last year, thanks in part to a surge in sales following the Japanese tsunami that crippled Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) . Ford still expects to turn a profit this year, but it said the total will be "substantially lower," for a number of reasons, starting with ...
  • Europe's a mess. Ford's sales in Europe were down a whopping 10% in the first half of 2012. Believe it or not, that's about in line with the overall market, which has been clobbered by tough economic conditions throughout the region. Not only are overall sales down, but margins have been hammered by competitive pressures to discount prices. Ford's overseas losses could triple the $190 million it lost in the first quarter, CFO Bob Shanks said. Much of that will be due to ongoing troubles in Europe.
  • Big investments will weigh. Ford is spending a ton of money -- roughly $5 billion so far -- in new factories and development facilities in Asia, especially in China. That investment is expected to pay off big in a few years, when Ford's sales in the region could double from current levels, but for right now, Ford's "Asia Pacific Africa" division is likely to be posting red ink.

Ford's guidance gives us an idea of what to expect from the numbers. But what can we expect from the rest of the earnings report -- the part where Shanks and CEO Alan Mulally tell us about the business?

What to watch for when Ford reports
As I said yesterday, the big issue right now is Europe. If Ford really lost something like half a billion dollars in the region during the second quarter, Mulally and company will be inclined to take swift action. A recent report from Morgan Stanley suggested that Ford could decide to close one or more factories in the region, with plants in the U.K. and Belgium thought to be at risk.

That would be the obvious step to take, as Ford likely has considerably more manufacturing capacity in the region than it can profitably use at present. But as General Motors (NYSE: GM  ) has discovered, plant closings in Europe can be complicated, drawn-out affairs. Guidance from Ford on this front will be carefully analyzed.

What else? Details on the recent launch (and recent recalls) of the all-new Escape SUV will be useful, as will any guidance on the timing and details of Ford's critical upcoming launch of the new Fusion sedan. News on Ford's efforts to reduce its debt now that it has an investment-grade credit rating, manage its pension shortfall, and increase production of key models here in the U.S. will also be worth reviewing closely.

Thanks in part to concerns about Europe, Ford's stock has been under pressure lately, with its stock dropping below $10 a share. But the company is still performing very well at home and is investing heavily for growth abroad. Have these short-term pressures created 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.

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, as well as 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.


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