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Ford's Q1 Earnings: An Early Preview

By John Rosevear - Apr 6, 2013 at 9:00AM

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Challenges in Europe and South America, and big ongoing investments in Asia, mean first-quarter earnings result could be a subdued one.

What should we expect when Ford (F 3.89%) reports earnings later this month?

One thing seems a safe bet: Ford will post a solid profit. But how will it compare with last year's? And how will the various challenges that Ford has been facing around the world affect the Blue Oval's bottom line?

The engine of Ford's global profits
Ford's North American unit is the "engine" of the company's business, as CEO Alan Mulally often says. With many European nations facing deep recessions, an aggressive effort by Ford to invest for expansion in Asia, and now increasing signs of challenges to Ford's bottom line in South America (more on that in a moment), it'll be up to North America to post a strong performance to power Ford's bottom line.

Fortunately, the signs have been pretty good on that front. Ford's U.S. sales made steady gains during the quarter, up 22% in January, 9% in February, and 6% in March, even as the overall U.S. auto market showed signs of cooling off.

More importantly for Ford's bottom line, full-sized pickup sales have been strong. Ford's F-Series lineup had its best first-quarter sales total since 2007, as a slowly improving U.S. economy led to an upturn in pickup purchases across the industry.

That's really important. Ford sells a huge number of F-Series pickups every month -- 67,513 in March alone. Not only are the volumes high, but pickups are high-margin products as well. That means they contribute disproportionately to Ford's bottom line in North America.

Fortunately, it looks as if that contribution was a hefty one in the first quarter. That bodes very well for the company's first-quarter result in North America, which should compare well with the $2.1 billion result it posted in the first quarter of 2012.

But the picture elsewhere in the world is a less cheery one.

Trouble in Europe and South America
In Europe, where Ford is the No. 2 automaker after Volkswagen, steep recessions in many countries have pummeled new-car sales. Ford has been hammered more than most in the past few months, as the company's reluctance to match rivals' deep discounts has cost it quite a few sales.

Ford has a comprehensive turnaround plan in progress for Europe, but it still expects to lose as much as $2 billion in the region in 2013. It's likely that first-quarter losses will be much greater than the $149 million it lost in Europe in the year-ago quarter, perhaps $500 million or more.

In South America, where Ford made $54 million in the first quarter of 2012, the company has already forecast a first-quarter loss of about $300 million. The problems are largely external: Weakening local currencies, inflation pressures, and stepped-up competition from market newcomers will all weigh on Ford, as Ford Americas President Joe Hinrichs told analysts last week. Ford still expects to break even in South America in 2013, but the near-term results could be challenging.

It's a much happier story in Asia, but not necessarily a more profitable one. Ford's sales in China through the first two months of 2013 were up a whopping 46%, as the Focus and Escape -- known as the Kuga overseas -- have proved quite popular with Chinese consumers.

But profits from those sales are likely to be offset by the continuing investments that Ford is making in the region. Ford expects Asia -- and especially China -- to be a major source of profit growth in the second half of the decade. The company is investing heavily now to build a base for that growth later on, and management has said it expects its Asian operation to break even in 2013.

The upshot: a solid quarter, despite challenges
Long story short, while North America could be substantially more profitable than it was a year ago, challenges (and investments) in Ford's other regions are likely to eat up much of the gains. I think it's likely that Ford will outpace the $1.4 billion profit it posted in the first quarter of 2012 but probably won't approach the $2.55 billion it reported in the first quarter of 2011.

That doesn't mean shareholders should be worried. Steady progress in Europe and Asia has Ford solidly on track to post significant bottom-line gains in a couple of years -- gains that should do very good things for the Blue Oval's stock price.

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