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1 Thing to Look for in Ford's Q2 Earnings

If you follow Ford (NYSE: F  ) , General Motors, or the automotive industry as a whole on a regular basis then you know what to expect during the quarterly reports. The industry is very transparent with monthly sales figures, incentives, and transaction prices – and all those factors have been very positive now that the first half of 2013 is in the record books. That's part of the reason for the optimism in Ford and why its share price is the highest it's been in about two years. There's one number in Ford's second-quarter earnings report that could throw a wrench in its momentum: losses in Europe.

What we know
For the second quarter, Ford saw an uptick in sales volume and market share. Ford basically said that it learned its lesson during the U.S. recession and wouldn't resort to dishing out massive incentives and taking huge losses per vehicle sold to salvage market share. Ford essentially conceded it would lose some share to minimize its profit loss. Instead, year-over-year June market share numbers show that Ford has actually gained a full percentage point, from 7.2% to 8.2%, in the 19 traditional European markets. 

That means that Ford gained in market share every month in the second quarter compared to the previous year. The quarter ended on a solid note as Ford's sales volume increased 6.4% in an industry that did the opposite – it fell 6.5%. The reason for this is Ford's strategy to focus on delivering a vehicle worth buying, rather than pushing unpopular models off the lots with the incentives I mentioned earlier – and it's working.

"With all the new vehicles and technology we are bringing to market, we made a big bet to focus on retail share and very deliberately reduce participation in sales channels that are less healthy for our brand and residual values," said Roelant de Waard, vice president, marketing, sales and service, Ford of Europe in a Ford press release. "This is paying off with the success of new vehicles like the Fiesta, Kuga, B-MAX and Transit Custom."

Even with all the good news in the second quarter, we still have to remember that Ford lost $462 million in Europe in Q1 and didn't revise its estimated yearly loss of $2 billion. That likely means Ford is either being cautious to not jump the gun on recovering its profits faster than expected in Europe, or it expects little to no improvement for the rest of the year. As a Ford shareholder I'd love to see a surprise decline in Q2 losses, but even if the losses remain exactly the same as in Q1, everything is OK in the big picture and the plan to break even in Europe in 2015 still remains. It's also a good sign that Ford isn't closing any more plant to cut capacity, which shows that management believes Europe's automotive sales have bottomed out.

Bottom line
It can't be underestimated how much the losses in Europe mean to Ford's share price. If Ford can indeed break even in the region by the end of 2015 it would salvage nearly $2 billion in lost profits per year. If all the positive news from Q2 sales volume and market share translates into a decline of losses reported in Europe, expect the market to react very favorably to the news – much to the delight of Ford investors. 

Salvaging Europe will be a huge boost to Ford profits, but success in China can be just as important. China is already the world's largest auto market – and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free – just click here for instant access.

Read/Post Comments (7) | Recommend This Article (8)

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 16, 2013, at 12:24 PM, petergrynch1 wrote:

    Latest sales figures out of Europe show that they are at a 17 year low.


  • Report this Comment On July 16, 2013, at 12:34 PM, picquay wrote:

    They are already shutting plants in Europe to combat losses and get supply and demand in check. This is not new news so you dont have to look for it. Look for the profit to nothing but go up in the future now that some UAW workers are scared for their job, and working for $18.00 an hour. I ask you, how can they NOT make money? It is great now, but when you need to buy a truck at $30,000.00. Dont be looking for someone making $37,440.00 to buy them.

  • Report this Comment On July 16, 2013, at 2:28 PM, poach wrote:

    I agree with you, most of the negatives are already in the price, any thing better than expected will be much better for the stock.

  • Report this Comment On July 16, 2013, at 2:55 PM, Brettze wrote:

    Investors either invest in GM/Ford stock or in Toyota/Honda/others stocks, generaly speaking. So when it comes to stock price, Ford is at disadvantage because Ford is paying down its debt while GM simply filed bankruptcy and collected $50 billon from Uncle Sam and turned around to file an IPO to help pay down debt . Then the government is already starting dumping its IPO shares to investors while GM got away scotfree without having to pay down any debt or buy shares back from Uncle Sam. GM got all the outside help while Ford just chumped along. Goldman Sachs downgraded Ford and thumb up GM. What is the use holding Ford stock ? By the time Uncle Sam completed its stock dumping by the end of 2014, chances is that the pent up demand for new cars will cool down. Ford stock will get whipsawed down.

  • Report this Comment On July 16, 2013, at 2:59 PM, Brettze wrote:

    GM getting all the freebies really put a major damper on Ford stock price . Ford should be at $30 or higher by now if not for GM's IPO and Uncle Sam 's dumping GM shares now ongoing until the end of 2014. Investors eagerly buy Government shares while buying nothing in Ford.

  • Report this Comment On July 16, 2013, at 9:51 PM, enginear wrote:

    Are you really serious Brettze!!?! GM got some free help, but they got stigmatized too... it scared investors, and the way I understand it, 'dumping' shares (especially large volumes of them) causes prices to fall and therefore tends to push investors toward other stocks (Ford?). And IPO=dilution.

  • Report this Comment On July 17, 2013, at 6:09 PM, SkepikI wrote:

    ^ worse than that. GM will have major "Grudge Issues" for years to come with auto customers. I expect Ford to be the beneficiary of that for at least a decade. Bond, Stock investors should be wary of GM, they wont be treated any better than the last group who were totally hosed when Bankruptcy rules were subverted. Recommend you and Brettze view John Rosevear's latest article, and particularly the commentary from those hostile to GM (maybe forever)

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