Ford's Second-Quarter Earnings: A Preview

Ford (NYSE: F  ) is set to report its second-quarter earnings on Wednesday. What should we expect?

Since the second quarter began back in April, Ford stock has gained more than 30% -- an impressive run for America's oldest automaker. But will Ford's second-quarter profits justify that price jump? Let's take a closer look.

Here's how Ford is making money
Before we dig into the numbers, here's a basis for comparison. Ford reported earnings of $1.04 billion in the second quarter of last year, and $1.6 billion, or $0.40 a share, in the first quarter of 2013.

Analysts polled by Bloomberg expect Ford's earnings for the second quarter to come in a little lower, around $0.37 a share. But as I'll explain below, that might be a little conservative -- or pessimistic.

The best way to understand Ford's earnings reports is to look at the breakdown of profits by each of its major business units. Those include four regional units for its automotive business, plus Ford Credit, its in-house financing arm. Let's look at each in turn.

One note: The overall earnings numbers I gave include the effects of taxes, but the numbers to follow for each of the divisions don't. That's the way Ford reports them.

North America
North America is the unit that has generated much of Ford's profits in recent quarters. Ford's pre-tax earnings in North America were just over $2 billion in the second quarter of 2012, and $2.4 billion in the first quarter of this year. What was the difference? Much of it had to do with sales of Ford's F-Series pickups, which have been very strong this year thanks to booms in construction and energy.

Those booms have continued. Ford sold 198,643 F-Series pickups in the U.S. in the second quarter, a 26% increase over its sales in the same period last year. Pickups are very profitable products, and they generate a huge portion of Ford's overall profits in its home market -- and lately, its total profits.

Well-equipped pickups like this top-of-the-line F-150 Limited are huge profit generators for Ford. Photo credit: Ford.

Ford's $2.4 billion pre-tax profit in North America last quarter was its highest since at least 2000. Given the continued boom in pickup sales, Ford's success on other fronts, and its ability (so far) to keep incentives in line, I wouldn't be surprised if this quarter's profit was in the same neighborhood, or maybe even a little higher.

South America
South America earned just $5 million a year ago and lost $218 million last quarter. Cheap imported competition (sound familiar?) and some unfavorable exchange-rate moves have hit Ford's South American arm hard. Ford had warned that last quarter's loss could hit $300 million because of a currency devaluation in Venezuela, only to have it come in better than expected.

The subcompact EcoSport SUV, based on the Fiesta's underpinnings, is a strong seller in Brazil -- and in markets like India as well. Photo credit: Ford.

Ford has been rolling out new and refreshed models in South America, with some success. Sales of the just-refreshed Fiesta and the new EcoSport SUV have given Ford some growth -- Ford's sales in Brazil, the region's largest market, are up about 9% so far this year. But it's clear that Ford still has more work to do, and there are more new models on the way.

Long story short, I don't expect another big loss, but any profit is likely to be small. South America is still a work in progress.

Europe
Europe has been Ford's biggest headache for a while now, as recessions have driven new-car sales to a 20-year low. Ford Europe lost $404 million in the year-ago quarter, and $462 million more last quarter. Ford has warned that it could lose a total of $2 billion in Europe this year, so another $400-billion-plus loss this time around wouldn't be much of a surprise.

But that said, there are some reasons for optimism. Last fall, Ford unveiled a comprehensive turnaround plan that's expected to return Europe to breakeven by the end of 2015. Ford still has much to do – there are three factories slated to close, and more changes coming -- but there are some signs that the plan is already bearing fruit.


The refreshed Fiesta is one of Europe's best-sellers. Photo credit: Ford.

After months of declines, Ford's sales in Europe were actually up last month, and the company is gaining market share thanks to some strong new models. It has also rolled back low-profit sales to rental-car fleets, which should also help margins.

Long story short, expect a loss -= but don't be too surprised if Ford's loss in Europe narrows, just as General Motors' (NYSE: GM  ) did last quarter.

Asia-Pacific-Africa
This is Ford's catch-all region, covering China as well as India, Southeast Asia, Africa, and the Middle East. The region has been just breaking even -- profits were just $1 million in the year-ago quarter, and $6 million in the first quarter of 2013. But that's not a bad thing: Income in this region is being plowed back into a massive expansion effort in India and China, where Ford is making a big bid to become a major player over the next few years.


The Ford Kuga, China's version of the Escape, has sold very well since its launch. Photo credit: Ford.

Ford's growth in China has been tremendous: Sales are up over 40% so far this year, as Ford continues rolling out its global product line to a very receptive Chinese audience. Already the Ford Focus is one of China's best-sellers, and the Kuga -- Ford's Escape SUV, tweaked for the Chinese market -- has been a strong seller since its debut earlier this year.

Long story short: Expect another break-even quarter, but that's not a bad thing.

Ford Credit
The credit arm's profits ebb and flow with the leasing market. It earned $438 million before taxes in the year ago quarter and $507 million in the first quarter of 2013. A profit in that general range is likely again this quarter.

The upshot: A good number is likely
So North America has continued to be strong, South America should be less of a drag, and there are early signs of improvement in Europe: Will Ford beat last quarter's $1.6 billion net profit?

Not necessarily. The company's spending on upcoming new products may well be higher this quarter than it was last quarter. But Ford's second-quarter profit is likely to be in the same neighborhood as last quarter's, and probably ahead of Wall Street's estimate. That should be a good thing for Ford's stock price.

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  • Report this Comment On July 23, 2013, at 11:55 AM, SkepikI wrote:

    John: The most useful of all your recent articles. Making me think about what to expect and why. Critical thinking prompts when the results get announced.

    My other commentary on effective management at Ford vs well, coasting at GM applies.

  • Report this Comment On July 24, 2013, at 7:43 AM, TMFMarlowe wrote:

    @Skepikl: Remember that GM is under new management. I don't think they're coasting at all, I just think that they've got more work to do in terms of culture change and getting their global act together than Ford does right now. I expect GM to surprise a lot of people over the next few years, frankly.

    I own both F and GM stock for good reasons. I'm happy to talk more about that if you like.

    Thanks as always.

    John

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