Retooling for a Radically New F-150 Sliced Ford's Earnings

Auto Show Ford F-150
AP/FordFord's new 2015 F-150 pickup is built almost entirely out of aluminum. That shaves as much as 700 pounds off the truck, which will make it more fuel-efficient and nimble, but retooling its factories to build it cost Ford a lot of sales.

Ford (F) said on Friday that its third-quarter earnings were down significantly from a year ago -- but not by quite as much as Wall Street analysts had expected.

Ford's third-quarter profit was $1.2 billion before taxes, a big drop from the $2.6 billion it made in the third quarter of 2013. But excluding some one-time costs, it made $0.24 per share, beating the $0.19 expected by Wall Street.

Why the big drop in profits? There were a few reasons, but the biggest factor was Ford's all-new F-150 pickup truck.

The New F-150 Isn't On Sale Yet, but It's Already Costing Ford Big

The all-new-for-2015 Ford F-150 isn't even on sale yet, and won't be for several more weeks. But it had an outsize impact on Ford's third-quarter earnings -- because the changes that Ford needs to make to its truck factories to build the new F-150 disrupted production.

Ford's F-Series -- which includes the F-150 and its Super Duty siblings -- isn't just America's best-selling vehicle, it's also Ford's most profitable product anywhere in the world. The F-150 is built in two factories, both of which have three crews making 60 trucks an hour, nearly around the clock.
That level of production is necessary for Ford to keep up with demand. But the all-new F-150 presents a huge wrinkle, production-wise: Its body panels are made of aluminum.

Making a vehicle out of aluminum requires very different tooling and processes from one made out of steel. Setting up Ford's two factories to make the new truck is a complicated, time-consuming and expensive process.

One of Ford's two truck factories, the Dearborn Truck Plant, has already been converted. Ford CEO Mark Fields said on Friday that it's fully up and running and has begun early production. But it was shut down for five weeks in the third quarter, and that meant that Ford dealers had fewer trucks to sell.

The upshot: The full-size pickups from General Motors (GM) and Fiat Chrysler (FCAU) posted big sales gains during the third quarter, while sales of Ford's F-Series declined.

That cost Ford big. Sales in its North America region were down 8 percent, revenues were down 6 percent -- and pre-tax profits fell by over 38 percent, an $886 million drop.

Challenges Overseas Also Weighed on Ford's Profits

The disruptions to Ford's pickup-truck production weren't the only challenges affecting its third-quarter earnings. Ford had warned back in September that economic troubles in Russia and Latin America would lead to greater-than-expected losses in both regions, and that turned out to be accurate.

Meanwhile, in Asia, Ford's sales have been growing rapidly -- but the company is spending billions in an aggressive expansion effort. It'll have five new factories up and running within nine months, but right now, the costs of getting them ready are cutting into profits.

Those overseas troubles -- and continued supply disruptions as Ford continues to gear up for the new F-150's launch -- will likely hurt earnings in the fourth quarter as well. Ford expects its full-year 2014 profit to total about $6 billion before taxes; through the first nine months, it has made $5.16 billion.

It's Cloudy Now, but Ford Is Forecasting a Much Sunnier 2015

Next year is shaping up to be much brighter. The investments that Ford is making in its new F-150 (and other new products), and in those new factories in Asia, will start to pay off.
Ford CFO Bob Shanks said on Friday that he expects the company's 2015 profit to rise to somewhere between $8.5 billion and $9.5 billion -- with all five of its regional business units improving on their 2014 results.

Shanks and Fields seem determined not to give investors any big negative surprises. The company held an Investors Day last month in which it gave clear guidance for the rest of 2014.

That guidance reflected lowered expectations for the third and fourth quarters. It wasn't what investors wanted to hear, and Ford's stock price took a hit. But the good news is that there were no surprises in today's numbers -- and that gives investors good reason to believe in Ford's rosier outlook for 2015.

Motley Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. Find out the easy way for investors to ride the new mega-trend in the automotive industry in our free report.