Ford Motor Company Gains Traction in Its Most Problematic Region

Ford's Fiesta remains the company's best-selling vehicle in Europe. Source: Ford Motor Company.

We all know the story by now. One of Ford Motor Company's biggest challenges has been its profitability in Europe, where Ford has been spinning its tires trying to earn a buck... or euro. The folks at the Blue Oval burn through cash in the region as if it's more valuable to use as a heat source than to shore up its financial statements.

Would Ford shareholders love a 19% boost to earnings? That's nearly what the difference would have been if Ford had broken even in Europe last year, rather than burn through $1.6 billion of bottom-line profit. It's even worse when you consider that Ford has lost roughly $3.4 billion over the last eight quarters -- that's a lot of burning cash. 

The good news is that Ford is continuing to make substantial progress toward its goal to break even in Europe next year. Here's a look at some positive data from the company's May results in Europe.

By the numbers
Ford recorded a slight decline of 900 units, or 0.9%, in European sales last month, compared to the prior year, but that doesn't tell the entire story. Ford's results last month faced a tough comparison from 2013 -- last year's May sales were inflated because supplies of popular vehicles, such as the Mondeo (Fusion), had just reached dealerships after months of constrained supply from a Belgium factory work stoppage. 

Looking at the bigger picture this year to date, sales are still trending favorably for the folks at the Blue Oval.

Ford's European sales increased by 7.7% through the first five months of 2014, compared to the same time frame last year. That was 110 basis points higher than the industry average 6.6% sales growth. In terms of vehicle sales, Ford sold nearly 99,000 units in May and nearly 497,000 units during the first five months of 2014. As Ford's sales continue to outpace the industry in Europe, so too does its market share; the company's year-to-date market share increased 10 basis points to 7.9%.

Digging deeper into Ford's European results there are some very positive takeaways.

More profitable sales
The difference between retail and fleet sales can be a tricky subject. Historically, fleet sales have been frowned upon and are thought of as a drain on profits. That isn't always the case; many fleet sales are very profitable and desirable, such as Ford's commercial van and light truck vehicles. The sales investors cringe over are those to rental fleets and dealer registrations; those sales can damage brand image, residual values, as well as margins.

One of the positive highlights from Ford's European results was that profitable fleet sales, those commercial vehicles previously mentioned, increased 12.8% in May and have risen 8.1% through the first five months of the year. That sales increase has pushed Ford's market share of commercial vehicles to 10.2% through May, which is its highest level in 16 years.

Not only are Ford's fleet sales becoming more profitable, but as its momentum in the commercial segment gains steam, its overall sales mix continues to improve to a more profitable scenario. Ford's sales to retail and fleet customers increased by 100 basis points to 72% of total sales through May, compared to last year. On the flip side, slightly less desirable sales to daily rental and dealer registrations declined to 28% of the sales mix.

In addition to Ford's market share gains and improving overall sales mix, there's another factor that will help Ford improve its profitability in Europe: newer vehicles.

Here's a nice tidbit for investors to chew on: More than 50% of Ford's sales through the first five months of 2014 were all-new or significantly refreshed vehicles. That's an important statistic, because new vehicles typically command higher average transaction prices and require less incentive spending to move off dealer lots -- a scenario that improves Ford's top and bottom lines, faster.

Foolish takeaway
Ford is making significant progress in Europe, which still remains a fairly gloomy market. Its profitability is turning around quickly -- consider that last quarter's $194 million loss in Europe was Ford's best quarterly performance in eight quarters -- and will continue to improve on the backing of newer vehicles.

Look for Ford to break even in Europe next year, which will provide double-digit upside compared to where the company's earnings are today. Ford completing its turnaround in Europe represents one of the fastest ways management can juice its bottom line, and it's a story investors must keep an eye on.

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Daniel Miller owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool 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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