If you just glance at Ford Motor Company's (NYSE:F) second-quarter results, you won't be doing the company justice -- nor will you be doing your due diligence as an investor. Ford's second-quarter wholesale volume and revenues were down slightly compared to last year, and America's second-largest automaker lost market share in every single region across the globe, except in Asia-Pacific.
Yet despite those negative factors, if you dig into the results, you'll see the light at the end of the tunnel -- and why investors are piling into the stock, sending it up nearly 2% at the time of this writing. Here's why.
Doing more with less
With so many positive angles, it's difficult to find a topic to start with. Let's start from the top, with the dreary official numbers, before covering Ford's first quarterly profit in Europe in three years, record quarterly North American pre-tax profit, and substantial cash flow.
Ford's top-line revenue checked in at $37.4 billion on slightly lower wholesale volumes, which was $500 million lower than last year's second quarter. Ford's second-quarter pre-tax profit, excluding special items, checked in at $2.6 billion, just barely edging out last year's result by $44 million.
Ford's after-tax earnings per share checked in at $0.40, a drop from last year's $0.45 result. When including special items of $481 million, Ford's net earnings per share checked in at $0.32 per share, a slight improvement compared to last year's $0.30 result.
Now, with that out of the way, let's get to the good stuff.
Despite Ford's struggles on top-line revenue and lower year-over-year after-tax results, make no mistake, this quarter was a clear glimpse into the high potential this automaker has over the next few years and beyond.
Let's take a quick look at some great highlights per region. Starting with the biggest surprise, Ford posted its first quarterly profit in Europe in three years! While the $14 million pre-tax profit won't stuff investors' pockets with much cash, it's better than throwing cash down the drain. Consider that Ford breaking even in Europe last year would have added about $0.40 earnings per share -- or roughly a quarter's worth of profits.
In addition to Europe, North America also recorded very strong results. In fact, North America posted a quarterly record pre-tax result of $2.4 billion. This quarter is a primary example of how important Ford's F-Series truck is for the automaker. Despite overall North America volume and revenue down a respective 5% and 3%, Ford's operating margin jumped 100 basis points to 11.6%, compared to last year's second quarter.
That operating margin increase was because Ford allowed sales of its F-Series to slip while awaiting the arrival of the 2015 model, yet it managed to keep higher transaction prices and the lowest incentives among its competitors' trucks -- a huge and profitable win for Ford and its investors.
Ford's Asia-Pacific region improved its pre-tax results from $130 million, during last year's second quarter, to $159 million. That improvement is even better than it appears, as Ford's expansion in China is very costly and was offset by surging sales, market share, and operating margins. While investors should temper expectations in the second half of the year, compared to its very strong first half of 2014, it is clear Asia-Pacific will be an extremely valuable region for Ford, and sooner rather than later.
All of Ford's regional results were more profitable, compared to last year's second quarter, except for South America, and that showed in its financial results.
This quarter was Ford's 20th consecutive profitable quarter coming off the doldrums of the financial crisis and Great Recession. Also, investors should be impressed with Ford's operating cash flow of $2.6 billion. That marks Ford's 17th consecutive quarter of positive operating cash flow, and was nearly double its automotive operating related cash flow during this year's first quarter.
Furthermore, consider that Ford's respective full year of operating cash flow in 2012 and 2013 was $3.4 billion and $6.1 billion, respectively. Because of Ford's strong first half performance of $3.8 billion, management is raising its full year guidance for operating-related cash flow. This development is great news for investors hoping Ford's improving cash flow will be returned to shareholders at an accelerated rate over the years ahead.
Ford's second quarter truly emphasizes the company's potential in the short-term and long-term. While wholesale volumes and revenues were down, expect that to change drastically once Ford completes its most aggressive vehicle launch schedule in history this year. Further, Ford is improving its operating margins at a time when costs to launch new vehicles are ballooning and five factories are being built in Asia-Pacific alone.
Put simply, Ford is doing more with less, and as new vehicles are launched globally, it will be doing much more with more. Stay tuned for a deep dive over Ford's performance in each region, there's much more to discuss!