Another Big Quarter for Ford

The rich get richer as the automaker posts its best third quarter in 20 years.

John Rosevear
John Rosevear
Oct 26, 2010 at 12:00AM

Upside earnings "surprises" aren't uncommon, but for Ford (NYSE: F) shareholders, this one had a nice ring to it: On Tuesday, the Blue Oval Crew posted third-quarter earnings of $1.7 billion, or $0.48 a share ($2.1 billion) excluding special items and taxes.

That trounced Wall Street consensus expectations of $0.38 a share, and that wasn't even the best news. Remember last quarter, when Ford management surprised us with a prediction that the company's cash on hand would exceed its debt by the end of 2011? Now they're saying that they'll hit that goal by the end of this year.

Sounds good. Is it?

Moving aggressively to reduce debt
Ford's impressive turnaround was funded by a mountain of debt -- at its peak, more than $30 billion worth, secured by everything it owned including the famous blue oval logo. Management has made huge strides in reducing and restructuring that debt, which stood at $26.4 billion as of the end of the quarter. Ford said it had paid off $2 billion worth of debt in September, and it planned to pay the remaining $3.6 billion it owes to the UAW's VEBA health-care trust this week, in cash. That money wasn't due until 2022 -- but paying it now reduces annual interest expenses by a non-trivial $330 million.

Overall, Ford said, including the VEBA payment, it will have reduced its total "automotive debt" (debt attributable to operations, versus that attributed to Ford Credit) by $10.8 billion since the end of 2009, saving $800 million in annual interest expenses.

That's huge. Even more huge: Ford's "automotive cash" hoard is up to $23.8 billion. Having cash on hand is critical for automakers, which rely on the ability to make large investments in developing products two or three years before those products come to market, and that's a very comforting sum. Better yet, as I mentioned above, management expects the cash to exceed the debt by the end of the year.

All of this is great news, and further evidence that Ford's turnaround is still on course. But the job's not done -- or perhaps we should say that opportunities for improvement are still out there, particularly overseas.

A mixed bag, globally speaking
Much of Ford's $2.1 billion operating profit -- $1.6 billion -- was driven by its resurgent North American operation. The tale should be familiar by now, and it's easy to recap: popular new models, a sustained increase in market share, and more profit per vehicle. The latter is a big story, one we've covered elsewhere, and it's due in part to the quality of the vehicles (they sell with fewer discounts) and in part to buyers' tendency to add high-profit options such as Ford's acclaimed SYNC "infotainment" system.

But while Ford is very much a "global" company, the overseas story is less impressive. Profits were down slightly in Latin America on a year-over-year basis, which Ford attributes to "increased commodity costs." That's no big deal, but the more significant decline in Europe is worth watching: Ford's European operation swung from a modest $131 million profit a year ago to a $196 million loss.

Ford's not the only automaker with a European problem. The end of government car-buying incentives and still-struggling European economies have affected the entire industry, but Ford has lost some market share and is falling behind a bit. The company seems to be moving aggressively to address the issue, attributing part of this quarter's loss to "structural costs to support product launch and engineering spending," and there's reason to hope that the imminent global launch of the new Focus will help the company's cause. Ford executives said they expect all of the company's business units to be profitable next quarter and in 2011.

Asia, particularly the huge Chinese and soon-to-be-huge Indian markets, is another area of concern (or perhaps opportunity) for Ford. Ford is still a tiny player in China, which it neglected until long after rivals such as General Motors, Toyota (NYSE: TM), and Honda (NYSE: HMC) had established a significant presence. And while Ford has come out of nowhere, more or less, to establish a presence in India with its low-cost Figo small car, it still lags far behind major players with a market share that is one-sixth that of local upstart Tata Motors (NYSE: TTM).

The good news is that Ford's impressive product story stands a good chance of driving gains in all of these markets over time. Meanwhile, though, profits from this fast-growing region remain minuscule: just $30 million in the third quarter.

Can Ford take advantage of this opportunity? I think the odds are good, but time will tell.

A big milestone within sight
Ford CFO Lewis Booth has repeatedly said that returning the company's credit rating to investment grade is a key goal, not least because it will reduce the company's ongoing interest costs. That goal seemed laughable two years ago, but today's numbers suggest that it's likely not too far off. And even better for shareholders, it's not impossible that we'll see a dividend sometime in the next year or two.

Think about it: If its success continues, Ford Motor Co. could be a legit blue-chip stock for the first time in decades. Who would have guessed?

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