At least it wasn't a surprise: Ford's (NYSE: F ) second-quarter earnings were down 57% over year-ago numbers as mounting losses in Europe overshadowed the Blue Oval's continued success in North America.
Ford's net income of $1.04 billion was slightly ahead of analyst estimates, but it represents a significant drop from the $2.4 billion it earned in the second quarter of 2011, before Europe's deepening recession clobbered auto sales in an important market for the company.
Still, there were bright spots for Ford, as the company continues to execute well in an increasingly tough global environment.
Europe troubles overshadow continued success at home
The nutshell story is this: Ford's operations in the U.S. remain strong -- so strong, that they're carrying the company while it deals with an array of challenges elsewhere. Last month, Ford warned investors that its losses overseas had grown sharply, and it wasn't kidding.
Here's how it breaks down, by business unit:
- North America was once again the "engine" of Ford's profits, as was widely expected. Strong sales in the U.S. drove a pre-tax profit of just over $2 billion, with a fine pre-tax operating margin of over 10%. The nutshell story: Even though Ford's market share has fallen since last year, thanks mostly to the resurgence of Toyota (NYSE: TM ) and Honda (NYSE: HMC ) , it's still selling plenty of cars and trucks here, and -- importantly -- getting very good prices for them. (In fact, it's selling so many Explorers and Focuses that it has added third shifts at the factories that make them.)
- Ford Credit, the company's U.S. financial arm, earned $438 million before taxes, down from $604 million in the year-ago quarter. But this drop was expected, and routine: Ford had fewer vehicle leases ending during the quarter, so Ford Credit had fewer used cars to sell. The financial unit's metrics continue to look solid, with managed receivables and leverage set to improve further as the year goes on.
- South America was profitable, but just barely: About $5 million, down sharply from the $267 million that Ford booked in the year-ago quarter. Sales volumes are down, costs are up, and exchange rates didn't help. Ford is planning to launch several new models in the region later this year; their arrival should help improve results.
- Asia-Pacific Africa, Ford's catchall name for "everywhere else," was a different story, despite a dismal number (just $1 million in pre-tax profits). Ford is actually doing very well in places like India and China -- the Focus, launched in China in May, has been a hot seller in the Middle Kingdom -- but it's also investing heavily for future growth, and that weighs on profits.
- Europe stunk, plain and simple. The Blue Oval's European unit lost $404 million in the quarter, a big drop from the year-ago $176 million profit. Volume's down -- Ford's sales fell 10% in the first half, about in line with the overall industry -- and it's not likely to improve in the near term. CFO Bob Shanks said that Ford now expects its full-year loss in Europe to exceed $1 billion.
Clearly, Europe is a rising problem that will demand a major overhaul. But for the most part, the rest of Ford is looking pretty strong.
A solid foundation, with more work to do
Ford's long-term debt was up slightly to $14.2 billion versus $13.7 billion at the end of last quarter, but that shouldn't raise concerns. Ford's cash hoard also rose, by $700 million to $23.7 billion, and the company has another $10.2 billion in available credit lines for total liquidity of $33.9 billion, up a billion from last quarter.
That should give Ford a more-than-ample reserve to weather any coming storms. And while the company doesn't see any big storms coming, it did mute its full-year guidance. CEO Alan Mulally said that he now expects Ford's full-year profit to be lower than 2011's, largely as a result of the European issues. Full-year profits for North America and Ford Credit should be strong, but Europe will weigh heavily, and South America and Asia-Pacific Africa should show improvement as new products and increased production capacity contribute to results.
The upshot? At around $9 a share, Ford stock is cheaper than it has been in a couple of years -- despite profits and overall financial strength that is miles beyond where the company was in late 2009. Given how far Ford has come, and given that the company's execution has been so hard to fault, I continue to think that the stock is a good buy for a patient investor. But as recent events have shown, it might be a wild ride for a while.
Thanks in part to concerns about Europe, Ford's stock has been under pressure lately, dropping to levels not seen in years. 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. Click here to get instant access to this premium report.