What are we likely to see and hear when Ford (NYSE: F) reports earnings next Friday?
While I don't expect the news to be bad, exactly, it's probably best if we temper our enthusiasm a little. Ford's products are better than they've ever been, and CEO Alan Mulally's team continues to execute remarkably well for the most part, but while a good profit is likely, renewed competition at home and tough economic conditions overseas are likely to put a damper on the proceedings.
Strong execution in a tougher environment
It has been clear for a while that the first quarter of 2012 won't be anything like the scorching-hot quarter we saw from Ford a year ago. Back then, the Blue Oval was firing on all cylinders -- with all of its regions around the world turning in solid profits as competitors struggled to keep pace.
Ford is still executing well, but a lot has changed in the past year:
- Tougher competition at home. A year ago, Ford's product renaissance was well ahead of archrival General Motors (NYSE: GM), and even Toyota (NYSE: TM) and Honda (NYSE: HMC) seemed caught off guard by the strength of Ford's latest products. Now, GM's own product overhaul is much further along, with cars like the Chevy Cruze racking up solid sales -- and new products from a resurgent Toyota have the Japanese giant on the offensive. The upshot: Ford has to fight harder for every sale, and -- while the company hasn't resorted to heavy incentives -- that puts margins, and profits, under pressure in Ford's all-important North American division.
- Hard times in Europe. Ford is doing better than many competitors in Europe, but that's not saying much: Sales were down more than 7% in the first quarter. That was good enough to gain market share, believe it or not, but the losses are likely to be heavy: Price-conscious European buyers have forced the manufacturers into a discount war, and everyone's profits have likely suffered. Ford Europe was profitable a year ago, but expect a sizeable loss this time around.
- Big investments in Asia. Ford's most recent investments in new Chinese factories may not be counted in the first quarter, but the company has been investing big in expansion in Asia for the past several quarters -- with an eye toward significant growth by mid-decade. That growth is expected to drive profits in a few years, but in the meantime, those capital investments -- and so-so sales in China, the world's biggest auto market -- will weigh. While Ford's Asia Pacific Africa division was in the black a year ago, a smallish loss is likely now.
The upshot? Ford should report a solid profit, but it'll be down significantly from last year's. Analyst estimates are currently running around $0.36 a share -- a big drop from the $0.61 it reported a year ago. Given the concerns I mentioned, it seems reasonable to expect a result in that range.
What to watch for in Ford's earnings
Beyond the issues I've already touched on, here are some of the things I'll be listening for during Ford's earnings call:
- Ford's debt load. It's nowhere near the $30-billion-plus level that Ford hit during the dark days of the economic crisis, but Ford's debt is still significant: $13.1 billion as of the end of 2011. That debt is well structured and well managed, but I expect that number to have come down at least a bit during the first quarter. If it didn't, I'll want to know why.
- Ford's pension liability. As of the end of 2011, Ford's global pension funds had a significant shortfall of about $15 billion, the company said. Ford may not have an update to share during its first-quarter earnings call -- but if it does, pay attention.
- Ford's cash position: Ford has almost $23 billion in cash on hand as of the end of the year. If that number rose or fell significantly during the first quarter, it'll be important to understand why.
Long story short, while the company seems to be executing very well, the global environment is a tough one. How tough? We'll find out, and I'll have a full report for you next Friday afternoon after Ford's earnings call.
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