Ford Is Making Big Progress in Europe

Ford Is Making Big Progress in Europe

Ford Motor has had a remarkable renaissance since the Great Recession. Under the leadership of Alan Mulally, the company has become consistently profitable. Moreover, Ford has been routinely surpassing a 10% pre-tax margin in North America recently, something that would have been unthinkable just a few years ago.

However, for the past two years, Europe has been Ford's Achilles' heel. Even as its North American profitability has soared, its European business went from roughly breakeven in 2011 to a massive $1.75 billion loss in 2012. Furthermore, at the beginning of 2013, Ford CFO Bob Shanks projected that the European loss would increase to around $2 billion in 2013, due to weak market factors and restructuring costs.

Luckily, the dire outlook from early 2013 was a bit of an exaggeration. Ford has already made solid progress in its transformation plan, and it now expects to post a smaller pre-tax loss than last year's $1.75 billion figure. The company's goal of returning to profitability in Europe by 2015 is looking more and more realistic, which will be a huge driver of earnings growth between now and then.

Bottoming out
After many quarters of contraction, the European auto market finally improved last quarter. This helped Ford achieve double-digit revenue growth in Europe. Ford executives now seem fairly confident that the European market has bottomed out. At the beginning of 2013, Ford forecasted industry sales in Europe at around 13 million vehicles, but the company now expects industry sales of 13.6 million vehicles this year.

Ford also has gained market share in Europe this year, largely thanks to a bunch of new products it had introduced. Its share of the retail market grew from 7% in Q3 2012 to 8.3% last quarter. These new products also helped Ford improve pricing last quarter, despite the competitive incentive landscape in Europe.

The result was a $240 million year-over-year improvement in European pre-tax profit, despite an additional $82 million of restructuring costs. These restructuring costs should go away by 2015, creating a natural earnings tailwind over the next two years.

Solid foundation for growth
Looking forward, Ford will have a much more manageable cost structure in Europe after it completes the closure of its factory in Genk, Belgium (which will occur at the end of 2014). It also closed two smaller factories in Great Britain earlier this year and moved production to larger, more efficient manufacturing plants.

At the same time, Ford is looking to accelerate its market share gains in Europe with a flood of new products. Last month, it committed to launching 25 new models in Europe in the five-year period beginning in September 2012. In other words, Ford wants to be ready with a fresh product line so it can gain market share during Europe's eventual recovery -- whenever that occurs. Ford's gains in the past year should give investors more confidence that this goal is achievable.

Ford's new frontier
While Ford still has exciting plans in the U.S., international markets are its biggest near-term opportunity. It has been growing rapidly in China, and it is now on the road to recovery in Europe. Getting Europe back to an acceptable level of profitability is worth billions of dollars in annual profit to Ford. Investors are likely to be quite pleased by its progress on that front over the next two to three years.

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Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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