Ford (NYSE:F) said on Wednesday that it earned $1.9 billion in net income in the third quarter, more than double its result in the third quarter of last year, as a big profit in North America helped offset some weakness in its overseas business units.
Excluding a (positive) one-time item, Ford earned $0.45 per share after taxes. That was up $0.21 from a year ago. But it was a bit shy of Wall Street estimates, and Ford's stock fell in early trading.
Strong results in North America, but a mixed bag overseas
Why did Ford miss estimates? Ford CFO Bob Shanks said that analysts likely assumed that Ford would pay taxes at a rate of 32%. Its actual rate was 33% during the quarter.
By any other measure, Ford had a very good quarter. A year ago, profit was held back by the big investments it was making in new products, particularly its new-for-2015 F-150 pickup. A year later, those investments are starting to pay off, just as Shanks and CEO Mark Fields said they would.
In North America, Ford earned $2.7 billion before taxes, up $1.3 billion from a year ago. Revenue of $23.7 billion was up by $3.8 billion, and the unit's operating margin was an outstanding 11.3%. The story is simple: Big sales of profitable trucks and SUVs.
Ford's pickup factories are finally up to full speed with the new F-150, and dealers had good inventories through the quarter. Ford's SUVs are also selling well, particularly the new-for-2015 Edge and the refreshed-for-2016 Explorer. The "mix" of products was a big positive factor, as buyers are choosing more profitable premium versions.
In South America, Ford lost $163 million -- but that's better than it sounds. Economic challenges and high inflation in several key markets is making the region a hard place to do business right now. (Rival General Motors (NYSE:GM) lost $217 million in South America in the third quarter.)
Despite the challenges, Ford managed a smaller loss (by $7 million) than it did a year ago. Price increases to keep step with inflation in places like Brazil helped, as did good sales of the new Ka minicar. Ford's guidance for South America is unchanged: It expects its full-year loss to improve compared with last year's.
In Europe, there continue to be signs that the company's turnaround effort is gathering steam. Ford Europe lost $182 million in the third quarter, but that's a $257 million improvement from a year ago. Ford Europe is selling more vehicles at better prices than it did a year ago, and its costs are under good control. But ongoing weakness in Russia, where Ford has significant investments, is still offsetting its gains elsewhere to some extent.
Middle East and Africa is Ford's newest regional unit, and it's a still-small work in progress. It lost $15 million on revenue of just under $1 billion. Pricing was up, and sales volumes were down a bit. This will be a significant contributor in years to come, but Ford expects it to just break even in 2015.
Ford's Asia-Pacific unit includes its big operations in China. It earned $20 million in the third quarter, down $24 million from a year ago. Revenue was flat, but sales and profits were down. Ford is working to reduce dealer inventories in China in response to a slowing market; that meant shipping fewer cars during the quarter. It was also gearing up for some new product launches, and Shanks made it clear that the unit should have a very strong fourth quarter as those products get to market.
Ford Credit, the company's captive-financing arm, earned a solid $541 million, up $43 million from a year ago. It's getting a bigger share of leasing business from Ford dealers in North America, and doing increasingly well in other regions. Credit losses remain modest.
Cash, debt, and special items
Ford ended the third quarter with $22.2 billion in gross cash on hand, up $1.5 billion from the end of the second quarter. It had an additional $11 billion in available credit lines, for total "liquidity" of $33.2 billion. That's an ample reserve against a rainy day.
There was one special item. Ford recorded a gain of $166 million from its holding in Nemak, a Mexican auto-parts company that went public in July. That's strictly an accounting change: Ford hasn't sold its 6.76% share of Nemak, and it will mark the shares to market in the future.
The upshot: Ford is delivering on its promises
Despite the "miss," Ford's third quarter was well in line with the (high) expectations set by Fields and Shanks early in the year. It reaffirmed its prior guidance to a full-year pre-tax profit of between $8.5 billion and $9.5 billion. That should be a slam-dunk: Through the first three quarters, Ford has earned just shy of $7 billion before taxes.
Historical trends suggest that next quarter's pre-tax result is likely to be lower than the $2.69 billion Ford earned before taxes this time around, but that's no cause for concern.
A year ago, Fields asked investors to be patient while Ford made big investments for the future, promising that those investments would begin to pay off in the second half of 2015. Ford is well on track to delivering on those promises, and -- despite the "miss" -- there's a lot for investors to like in these results.