Earnings season is here, and your investments will be subject to volatile swings if they beat or miss estimates by the slightest of margins. Sometimes a company (F 3.89%)can even beat Wall Street's earnings estimates and still drop because of other factors -- such as losses in Europe, in the case of Ford (F 3.89%). The trick for investors is to try to know as much as possible and anticipate what's going to happen next week on Ford's conference call.
Just about everything is going Ford's way right now, including record monthly and quarterly sales for different vehicles. Can the highly profitable F-Series and other vehicle sales outweigh the black hole of Europe that's sucking profits into the abyss at light speed? Let's take a look.
If you follow the auto industry, you probably know the average car on the road is 11 years old -- a record high. What you might not know is that the average truck trumps that number at 13 years. With parts of the economy now turning the corner, Detroit has enjoyed a surge in sales of trucks, its most profitable vehicle segment, as drivers are finally putting their old vehicles to rest. Truck sales are up 23% in the first quarter.
Here's where it gets tricky. As the financial crisis hit and forced Detroit companies to cut costs as quickly as possible, many factories were shut down. Three of Ford's six pickup plants closed, including two that produced the F-150. Now that pickup levels have surged back, Ford has the remaining three plants working three shifts to produce enough to meet consumer demand. Right now every F-150 being produced on the third shift is much more profitable than normal. That's good news for investors, as the margins will get an extra boost from the lessened overhead cost and will help inflate the bottom line reported next week.
Ford considers moving 50,000 F-Series in a single month a fantastic number, and last month it posted more than 67,000 in sales, which forced all remaining plants to work full capacity. The F-Series has sold 168,843 units in the first quarter, a 17.4% increase. Given that the F-Series brings in a majority of Ford's profit margins, that's very welcome news.
As I mentioned earlier, a lot of things are going in Ford's favor. The recently refreshed Fusion and Escape models marked record sales for the quarter, leading their respective categories to significant increases. The SUV/utilities segment sold just over 169,000 units in the first quarter, good for a 20.4% increase over last year, while Ford's passenger cars almost broke 205,000 units sold, for a 12.5% jump.
In short, Ford looks to be doing everything it can to outweigh its massive European losses. But it has one more trick up its sleeve.
As some of you know, the majority of Ford's $100 million in debt is derived from its financial division -- not from automotive debt. Ford takes more than $80 billion in loans as debt and dishes it back out to consumers at Ford dealerships at a higher interest rate -- making a nice profit in the process. In 2012, the profit it made from its finance division was $1.7 billion -- exactly equal to the loss in Europe. If the rise in vehicle sales has also attributed to gains in its finance division, Ford could be set up for a nice quarterly conference call next week. If the losses in Europe exceed $500 million and investors freak out, sending the stock price downward, I'll just laugh at the short-term nonsense and pick up more shares, knowing that so many things are going well for Ford.