Ford's Hidden Profit Driver


Photo Credit: Ford

When analysts discuss the driving forces behind Ford (NYSE: F  ) and General Motors' (NYSE: GM  ) profits the usual suspects are always full-size pickups and North America. While that's definitely true, Ford actually has a profit driver that most investors tend to forget about: Ford Credit. Consider that the biggest drag on Ford's bottom line has been its losses in Europe, totaling $1.7 billion last year, yet Ford Credit nearly offset all those losses with its very own $1.7 billion in pre-tax profits in 2012. That's something Ford's competitors can't claim, and the good news for investors is that Ford Credit's profits are is still growing.

Ford posted an excellent third quarter recently, beating Wall Street estimates. Ford Credit also quietly posted a strong third quarter with pre-tax profits of $427 million. That's a $34 million improvement over last year's third-quarter result of $393 million. 

If you break Ford's results down by market regions, Ford Credit would be more profitable than anything outside of North America. In fact, Ford Credit brought in more pre-tax profits than the Asia-Pacific-Africa and South America regions combined.

That's more of a positive development for Ford Credit than a knock against Ford's international markets, which are gaining momentum.

Consider that South America's pre-tax profit of $159 million in the third quarter was $150 million higher than last year. With the region's wholesale volume and revenue up 22%, Ford now expects South America to break even or be slightly profitable for the full year -- an improvement from its prior guidance.

Ford's strategy in Asia-Pacific-Africa is beginning to pay off and management expects to remain profitable for the full year, largely driven by success in China. For the first nine months of the year, volume, revenue, operating margin, and profit all improved over last year. Its pre-tax results improved by $81 million for a total of $126 million in the third quarter, driven by a 35% increase in wholesale volume.

Ford's international profits are gaining momentum and Ford Credit is still outpacing them with its pre-tax results -- a very good sign for Ford's bottom line going forward.

"We remain solidly on track for 2013," Ford Credit Chairman and CEO Bernard Silverstone said, in a Ford press release. "We are growing along with Ford and continue to offer a full range of financing products and the world-class services that support Ford sales, our dealers and customers."

One thing to remember
One very important thing for investors to remember about Ford Credit is that it contributes the vast majority of Ford's debt. Most investors see Ford's more than $100 billion in debt and wrongfully assume it's from the huge amount of losses and loans taken out during the financial crisis in 2008.

That is far from the truth.

As I explained earlier, Ford Credit is very profitable. And to be this profitable it must take on huge loans at low interest rates and then dish loans back out to buying consumers at higher rates -- thus making a decent profit. Currently Ford Credit has $94 billion in debt and is tossed in with Ford's automotive debt, which balloons the company's debt figures when compared to competitors that don't have a finance division like Ford's.

Ford Credit, and its pile of debt, is often misunderstood and underappreciated. It remains a healthy, very profitable, and hidden driver of Ford's bottom-line profits. It also remains a nice competitive advantage for the folks at the Blue Oval. 

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