Ford's Fourth-Quarter Profit Shows Strength at Home


A solid quarter for Ford : The automaker reported a fourth-quarter pre-tax profit of $1.7 billion, or $0.31 a share, well ahead of the $0.26 a share consensus analyst estimate.

It was Ford's highest fourth-quarter pre-tax number in over a decade, a substantial improvement over the $1.1 billion (before special items) that it reported in the year-ago quarter. For the full year 2012, Ford earned $8 billion before taxes, or $1.41 per share, down about $800 million from 2011.

Ford still faces substantial challenges, notably in Europe, and those challenges will continue to weigh on earnings for a while. But that said, a lot of things are going well for the Blue Oval right now.

The ups and downs of a decent quarter
Ford's good quarterly result isn't really a surprise. The company has been dropping hints for a few weeks now --- starting with a big increase in its quarterly dividend -- suggesting that its results would be strong. But as always, some of Ford's business units were stronger than others:

  • North America, as always the "engine" of Ford's business, had a terrific quarter, with pre-tax profit of $1.87 billion. A good number here was widely expected, as strong sales of high-margin pickup trucks and a disciplined approach to incentives kept overall operating margins strong, just as we saw last quarter. This came even as Ford's market share dipped a bit, a dip that CFO Bob Shanks attributed in part to shortages of the all-new Fusion sedan as production lines continued to ramp up during the quarter. Ford's operating margin in North America for the full year 2012 was a record, the company said, and it expects that strength to continue through 2013.

  • South America did fairly well, with a $145 million pre-tax profit for the quarter, up from $108 million a year ago. Ford recently launched several new products in the region and business has picked up as those new vehicles have gained market traction. On the downside, exchange rate shifts in places like Brazil hurt results, and other currency challenges in the region cloud the company's outlook for 2013.

  • Asia Pacific Africa posted a pre-tax profit of just $39 million, but that's far from the whole story. The market winds are definitely blowing Ford's way throughout the region, as the company found itself with (among other prizes) one of China's best-selling cars in 2012, the Focus. Sales and revenues were up substantially from a year ago - but those gains were largely offset by Ford's big ongoing investments. Ford is on-track to be a major player throughout Asia by mid-decade, and results here are likely to run around break-even for several more quarters as the company invests in ramping up its presence toward that goal.

  • Europe's results were ugly, plain and simple, as the company posted a $732 million pre-tax loss. That was somewhat wider than expected, but as Ford said it was "more than explained" by an industrywide drop in vehicle sales, and as Ford began to recognize costs related to the three factories it plans to close in the region, Shanks said. The quarterly sales rate for the 19 markets Ford tracks as "Europe" was the lowest since 1995, as continuing deep recessions in key European countries have kept consumers away from car dealers. The outlook here will be grim for a while, but Ford is taking major steps that should right the ship by mid-decade.

  • Ford Motor Credit, the company's captive financing arm, reported a pre-tax profit of $414 million. That was down from $506 million in the year-ago quarter, but that's not a major source of worry. The company said that the decline was explained largely by having fewer lease terminations during the quarter versus last year, meaning fewer lightly used cars to sell.

Long story short: North America continues to be very strong, big investments in Asia continue, and Europe - unsurprisingly -- continues to be a big drag on profits, even as Ford works hard to restructure in the region.

The outlook for 2013: pretty good, except for Europe
Overall, Ford's outlook for 2013 is solid, and mostly not unexpected. The company expects continued strong results in North America, where the product line is fresh and competitive, costs are well-controlled, and industrywide sales in the U.S. are on the rise.

Overseas, it's more of a mixed bag. South America will likely break even for the year, as competitive pressures and currency movements offset gains from new products. Asia Pacific Africa, as noted above, will also run around break-even as Ford continues to plow money into new plants and other facilities in places like China and India - and as it continues to roll out more of its global product line to customers in the region.

Europe continues to be the problem child. While there is good reason to be confident that Ford's restructuring plan will bear fruit by mid-decade, losses in the region continue to be steep - steeper, in fact, than many had expected. Ford's outlook for the overall industry in the region has deteriorated over the last quarter, Shanks said, and the company now expects its full-year loss in Europe to be about $2 billion, up from the $1.75 billion it lost in Europe in 2012.

The upshot: moving forward
Shanks reiterated that Ford was ready to take "further action" if needed to bring Europe under control by mid-decade, a remark that should reassure shareholders that Ford has things under control - in contrast with rival General Motors , which continues to struggle with its own Europe restructuring.

Fortunately for Ford, the strength of the U.S. market - and the strength of its competitive position here - will more than offset the costs of its overseas challenges. As long as that strength continues, and as long as Ford continues to make progress overseas, shareholders can continue to be optimistic about the Blue Oval's prospects over the next few years.

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