Ford’s Weak International Results Reduce the Benefit of Record North American Profit


Ford Motor Company reported first quarter results that beat consensus. Adjusted EPS came in at $0.41 versus consensus expectations of $0.37 thanks to Ford’s continued outstanding performance in North America. First quarter automotive margin was 5.2%, about in-line with our model. With the European auto market in a severe recession, if not depression, and Ford still growing off of a small base in Asia while recouping its investment costs there, analysts expect the rest of 2013 to have a similar pattern to the first quarter. Specifically, investors expect continued very strong results from North America and weak results from the rest of the world, especially Europe. Management still expects the company to lose about $2 billion in Europe this year, up from a $1.8 billion loss in 2012.

Ford reported a market share loss in Europe of 80 basis points from 1Q 2012 to 7.7% which was due to lower fleet business. The unit lost $462 million in the quarter and operating margin declined nearly 500 basis points from the prior year’s quarter to a negative 6.9%. It is good to hear however that Ford’s retail share in the five largest western European markets increased 20 bps to 8.4%.

The Kuga crossover continues to be in high demand and the highly successful Fusion in the U.S. will go on sale in late 2014 as the next generation Mondeo sedan. Also positive is that the company will be taking as much as $500 million of costs out of the system with the closing of its Genk assembly plant at the end of 2014 and two U.K. plants this year.

Analysts like Ford’s restructuring plan but we are concerned that the horrible start to the industry in first quarter, German industry registrations for example declined 12.9%, will cause Ford to increase its loss expectations for Europe later this year.

Investors remain very optimistic on the U.S. auto industry but international results may deter the market from rewarding Ford’s stock for its outstanding North American results. Europe will remain in bad shape for the mid-term as discussed and Asia is barely profitable as Ford is still investing for growth in China. South America lost $218 million in the first quarter which was mostly from devaluation of the Venezuelan currency.

Although Venezuela is a very small part of Ford South America, the company cannot get its cash out when a government mandated devaluation occurs, so these assets take a large hit to their value. Ford South America still posted year-over-year improvement in volume and mix plus a strong $204 million improvement in pricing so the news is not all bad in the region.

Ford finished the quarter with total automotive liquidity of $34.5 billion which was flat from year-end. This liquidity balance includes $10.3 billion available on credit lines. Automotive debt did increase from year-end to $16 billion from $14.3 billion, which primarily reflects the $2 billion 30- year 4.75% bond sale in January. The proceeds from this deal were used to retire the remaining $592.7 million of 7.5% 2043 notes at par and the rest of the funds will be contributed to the pension. Ford’s automotive net cash position declined to $8.2 billion at March 31 from $10 billion at year-end.


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