Ford's (NYSE: F) recent turnaround has been one for the record books. Left for dead just a few years ago, the Blue Oval has managed a remarkable transformation. With great products, consistent profits, cash in the bank, and steady, smart management, Ford appears poised for success.
But "success" in the global auto business doesn't always make investors happy. When regional economies hit the skids and auto sales tumble, even the best-run automakers have to tighten their belts. Ford isn't facing anything like the existential threats it faced last decade, but the second half of 2012 could pose some challenges for the House That Henry Built -- challenges that might take the shine off of its stock.
Challenges overseas will trim Ford's profits
Ford CFO Bob Shanks warned last week that losses from overseas operations were likely to dent Ford's profits in the second quarter, and for the foreseeable future. Three of Ford's five principal business units are likely to post pre-tax losses for the current quarter that will be roughly triple the $190 million lost last quarter.
Each of these units is facing different kinds of pressures, but all could continue to suffer through the rest of the year and beyond:
- Ford Europe has so far faced the region's economic challenges better than most of its competitors. But slumping sales and unfavorable pricing pressures are hitting all of Europe's automakers, and Ford is no exception. In an SEC filing last week, Ford said that it has experienced a "decline in margins" and that it "expect[s] this pressure to continue for the foreseeable future." Unlike General Motors (NYSE: GM), which is planning a major restructuring of its cash-torching European unit, Ford is unlikely to take significant action in the near term: Its European operation is already pretty lean. That means the unit will recover sooner than most, but it also means that there's not much that can be done to stem losses in the interim.
- Ford South America is under somewhat different pressures. GM and other automakers have stepped up their games in the region recently, increasing competitive pressures on Ford. Meanwhile, unfavorable currency shifts and regulatory hassles have increased Ford's costs as expressed in U.S. dollars, and the upshot is that the unit -- which eked out a $54 million profit last quarter -- is likely to swing to a loss. What can be done? That's unclear right now: Expect Ford to give more details in its second-quarter earnings release, later in July.
- The story is somewhat different in Ford Asia Pacific Africa. Ford is making huge investments -- $5 billion so far -- in the region, particularly in China, where it hopes to roughly double its sales by mid-decade. As Ford said last week, "While our volume is up in the region, our investment and growth costs are rising faster for now." It's hard to fault that from an investing perspective, but it will dent profits for a while.
These challenges aren't the end of the world, of course: A big chunk of Ford's earnings come from its North American and Ford Credit units, and as long as U.S. auto sales stay reasonably strong, Ford will stay comfortably in the black. But year-over-year profit comparisons won't look good, and that's likely to keep share prices down.
Meanwhile, Ford's product plan rolls on
A primary aspect of Ford CEO Alan Mulally's turnaround plan was to create a single, global product line. By eliminating regional products and offering a single line of vehicles around the world, Ford was able to reduce its fixed costs -- while increasing the investment it could make in every model. That had led to much-improved cars and trucks, and models that are gaining in popularity around the world -- the key to Ford's turnaround.
Ford's product approach features a "high cadence" -- industry-speak for frequent, regular new-product introductions. That will continue through this year: Ford has just begun rolling out its all-new Escape SUV to dealers around the U.S., and more models are coming. The all-new Fusion sedan is due this fall, as is the C-MAX, a hybrid mini-minivan based on a European mainstay that is being positioned as a competitor to Toyota's (NYSE: TM) Prius V.
The Fusion is likely to be a big deal. More advanced (and more attractive) than the very good outgoing model, it is likely to do very well against the segment standard-bearers, Honda's (NYSE: HMC) Accord and Toyota's hot-selling Camry. In fact, the limiting factor to Fusion's sales growth might be Ford's ability to make it; I will not be surprised if Fusion production is soon maxed out like that of its Focus and Explorer line-mates.
As is typical with Ford nowadays, these new models will be rolled out around the world: The Escape will be known as the Kuga and the Fusion as the Mondeo in Europe and elsewhere, but they'll be the same vehicles -- and they should compete similarly well in those markets. Whether that will help Ford's situation overseas remains to be seen, but if Ford can hold its competitive position while economies recover, it should be well positioned for solid profits once recessions fade.
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