How Ford Motor Company Is Inching Closer to Profitability in Its Most Difficult Region

As any Ford Motor Company investor will tell you, Europe has been a major drag on earnings. Despite the profit drain, Ford is inching closer to profitability in Europe.

Apr 16, 2014 at 5:31PM

I've owned shares of Ford (NYSE:F) for a long time, and when the Blue Oval finally posts its first quarterly profit in Europe in quite some time, I'll be popping champagne in celebration. This profit black hole has devoured $3.3 billion of the company's net income over the last two years, but America's second-largest automaker is inching closer to breaking even on the continent. Here's proof Ford is on its way to a profitable future driven by market share gains and an improving sales mix.

Images

Ford's 2014 Fiesta. Source: Ford.

Better sales
Ford kicked off 2014 sales in Europe with a strong 11% increase in the first quarter, compared to the industry's 8% increase, with sales topping 326,000 vehicles in the company's main 22 European markets. If you're counting, March marked Ford's 10th straight month of year-over-year sales gains in Europe; it also capped off the fourth-consecutive quarter of gains.

Ford's gain in sales was driven by the U.K., its biggest market in Europe by sales volume, where sales jumped 13% in March and 11% during the first quarter. In Germany, sales jumped 19% in March, and a hit a staggering 24% for the first quarter.

Narrowing sales down to specific vehicles, Ford's Fiesta continues to lead the charge; its European sales increased 7% in the first quarter -- the company had to increase production at its Cologne, Germany, plant to meet rising demand. Ford's Focus and Kuga (Escape) followed behind the Fiesta to round out the company's three best-selling vehicles, with the Kuga posting a steep 56% year-over-year sales increase for the quarter.

There's no arguing that Ford's sales in Europe are improving; what's even better is that the sales mix is improving in tandem. 

Better mix
Oftentimes investors consider fleet, government, and rental sales as bad news for profits, but that's not always the case. In fact, fleet sales can be plenty profitable, and it's really rental sales that deserve the bad rap. Fortunately for Ford investors, as sales continue to improve, so does the percentage of high-quality sales.

Ford considers sales to retail customers and fleets as high quality. Those high-quality sales comprised 73% of Ford's total sales in Europe during the first quarter. Conversely, less profitable sales, those to daily rentals and dealer registrations, declined to 27% in the three-month period, compared to 28% a year ago. One-percent may not sound like much, but in a region where Ford has burned more than $3.3 billion in profits over the last two years, it's a big deal and a tiny step closer to profitability.

Both Ford's overall and high-quality sales continue to accelerate -- the company is clearly moving to a brighter future in Europe.

Better future
A large part of Ford's recent sales success in Europe is due to the company's newly launched vehicles. Consider that 43% of Ford vehicles sold on the continent are all-new or significantly refreshed models. Just as we've seen happen in the U.S., Ford's new models are winning market share from competitors in Europe. Ford has launched 11 new vehicles in the region over the last 15 months; it doesn't appear to be ready to slow down, with another 10 new vehicles planned for release this year.

With Ford's story in Europe highlighting market share growth, a better sales mix, and a brighter future loaded with new vehicle launches, I expect Ford to be celebrating a profitable quarter in the automaker's most difficult region early next year. 

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Daniel Miller owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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