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Ford's Turnaround Accelerates With Strong Q1 Results

By Adam Levine-Weinberg – Apr 27, 2019 at 2:11PM

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Ford's strategy of discontinuing unprofitable car nameplates while introducing new crossover, SUV, and truck models is already starting to pay dividends.

In the years after the Great Recession, Ford Motor (F 0.36%) reported a string of impressive profits. However, the automaker started to lose steam in 2016. Its adjusted pre-tax profit then fell by $1.9 billion in 2017. Ford took a turn for the worse in 2018, as adjusted operating profit plunged another $2.6 billion, sending the company into full turnaround mode.

Over the past year or so, Ford has made some tough decisions, as CEO Jim Hackett and his team have moved to reshape the storied auto giant. Those moves, along with some longer-term product initiatives, are already starting to pay off, as evidenced by Ford's surprisingly strong performance in the first quarter of 2019.

Ford returns to earnings growth

Auto sales have plateaued in the U.S. over the past couple of years, while many international markets are contracting. High commodity costs, growing trade tensions, Brexit, and the strong dollar have all created additional headaches for Ford and its peers.

Despite these headwinds, Ford's adjusted operating profit rose 12% last quarter, reaching $2.4 billion. Adjusted earnings per share rose just $0.01 to $0.44, because of higher taxes, but this still blew by the average analyst estimate of $0.27.

A white Ford Ranger perched near a cliff

Ford posted an unexpected increase in its profit last quarter. Image source: Ford Motor.

This earnings growth was particularly impressive because Ford ramped up its investments in autonomous vehicles and mobility services last quarter, spending $288 million, up from just $102 million in the first quarter of 2018. However, the Ford Credit financing operation increased its pre-tax profit by $160 million year over year, offsetting most of this additional spending.

In the core automotive business, virtually all of Ford's profit growth last quarter came in North America. Operating profit in the region surged 14% on a 2% revenue increase, powered by strong truck sales and the Lincoln luxury brand's return to growth. Ford's North American operating margin expanded by nearly 1 percentage point to 8.7%. Profitability was roughly flat year over year in the rest of the world.

The shift toward higher-margin models is the key

About a year ago, Ford decided to discontinue all of its traditional passenger cars in the domestic market. Instead, the Blue Oval is introducing a slew of new crossover, SUV, and truck models. This process started in early 2018 with Ford bringing the EcoSport subcompact SUV to the U.S., continued a few months ago with the return of the Ranger midsize pickup, and will culminate with the launch of the Ford Bronco and another all-new off-road SUV in the next year or so.

These models are all more profitable to produce than basic sedans and hatchbacks. Importantly, these are also the types of vehicles that most consumers want to buy these days.

Ford noted that the discontinuation of unprofitable car models (primarily the Focus and C-MAX, so far) and higher truck sales drove the company's operating profit growth in North America last quarter. In fact, Ford reported that better mix in North America contributed $580 million in incremental operating profit on a year-over-year basis in the first quarter, more than explaining all of its earnings growth.

There's plenty of upside ahead

Outgoing Ford CFO Bob Shanks noted that Q1 was likely to be the best quarter of the year for the company in 2019, because of the timing of vehicle launches as well as normal seasonal factors. Nevertheless, Ford is on track to post higher full-year earnings, confounding skeptics.

Furthermore, Ford is just starting to implement a global earnings improvement plan. That will include exiting some underperforming markets, forming joint ventures to pool investments, and cutting costs through workforce reductions and factory closures. It will also include product mix shifts in international regions similar to what Ford is already doing in North America.

Ford still has a slew of new and upgraded crossover, SUV, and truck models coming in North America over the next 18 months or so. Those new products should boost earnings in 2020 and 2021. The company is moving in the same direction in international markets, but is even earlier in the process there. This highlights the substantial profit growth opportunities for Ford over the next several years.

Adam Levine-Weinberg owns shares of Ford. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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