One Bright Spot in Ford Motor Company's Disappointing Q1 Results

Ford Motor Company's profits dipped in the first quarter, but here's a silver lining for investors.

Apr 29, 2014 at 1:00PM
Amulally

Alan Mulally in front of a Ford Fusion. Source: Ford Motor Company.

Investors were all ears on the recent conference call, listening for any truth to the rumors that Ford (NYSE:F) CEO Alan Mulally is planning to step down earlier than planned. Those investors hoping for additional details were disappointed during the first-quarter call. At least for now, Mulally isn't stepping down... or jumping ship to help run the Detroit Lions. Officially, Mulally isn't straying from the plan to stick with the Blue Oval through 2014. Still, even the industry's best CEO couldn't save Ford from a less profitable first quarter compared to first quarter 2013: Wholesale deliveries and revenue rose, but Ford's quarterly profit plunged 39%. While the worse than expected results sent some investors to the door on Friday, there were multiple positive takeaways. Here's one positive result from Ford's first quarter.

International company of mystery
One consistent knock against Ford as an investment is its reliance on North America for a large chunk of its revenue and nearly all of its profit. Leaning hard on North America has been fine over the last half-decade, as vehicle sales have consistently grown year over year, but that reliance would become a big risk for Ford and its investors if growth were to slow or reverse.

To remedy this, Ford has invested heavily in production capacity, marketing campaigns, and new vehicle launches to jump-start growth in a certain market that the company began entering years late. Ford's results internationally have been a mixed bag, but the first quarter was proof that significant progress is being made in that one key region: Asia-Pacific.

The Asia-Pacific region
It was glaringly obvious at the beginning of this decade that Ford had dropped the ball getting into the world's largest automotive market, China, which significantly drives results in the company's Asia-Pacific region. It was already far behind crosstown rival General Motors (NYSE:GM), which is competing to be the top foreign automaker, in terms of sales, in China.

Ford knew that making up ground on its competitors in China would be vital to its success in its Asia-Pacific region, which has the potential to greatly reduce the company's dependence on North America. That made it an easy decision to spend roughly $5 billion to double its production capacity, sales, and market share in China from 2012 levels by mid-decade.

A couple years later, Ford and its investors are already seeing substantial progress in China.

Ford
Graph by author. Source: Ford sales reports.

Ford's sales in China nearly reached 104,000 in March, which was the company's first single month of sales to top 100,000 in the nation. Last year, Ford's sales in China passed those of its Japanese rivals Toyota and Honda, which have struggled to fully recover from spiraling sales after a territorial dispute erupted between Beijing and Tokyo well over a year ago. Ford's first-quarter wholesale sales in China surged 45%, which drove a 32% gain for the Asia-Pacific region.

Ford's Asia-Pacific revenue rose 19% in the first quarter. However, simply increasing sales and revenue doesn't guarantee profitability in the region, which was reflected in last year's first-quarter result of a negative 1.3% operating margin that culminated in a loss of $28 million in Asia-Pacific. Fortunately, that has reversed this year, and significantly.

Ford's Asia-Pacific region posted a whopping 1,240 basis point increase in its operating margin, to 11.1% in the first quarter. That helped drive the automaker's pre-tax earnings in the region to $291 million for the first quarter. If you're doing the math, that's a $319 million improvement from last year's result, as well as Ford's record quarter in the region.

Foolish takeaway
Ford's story is just beginning in China and the Asia-Pacific region. At the end of last year, the region accounted for roughly 8% of Ford's total revenue. As the company continues to gain market share, introduce new models, and increase production capacity -- consider that Ford has six major facilities under construction in the region -- it expects the region to account for 40% of company revenue by the end of the decade.

That's a huge increase, and continued success in the Asia-Pacific region should soon erase criticism that Ford is far too dependent on North America for its success.

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Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends General Motors. 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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