Ford Motor Company's European Sales Result Offers a Bright Side

Ford Motor Company headquarters in Dearborn. Source: Ford Motor Company

To say that Europe's automotive market has been a thorn in Ford Motor Company's side during the past five to 10 years, would be a severe understatement. Ford has burned billions of dollars in its European operations and the region has been a drag on profits since the financial crisis. Sadly, it would have been just as profitable if Ford's executive team flew to Europe and stuffed dollar bills in competing vehicles' tailpipes, rather than try to sell its own vehicles.

Fortunately, Ford's exec team took the high road and developed a realistic plan in 2012 to turn things around in Europe. Recent numbers coming from the region emphasize the turnaround is gaining traction.

By the numbers
Ford's European sales - which can be tricky and are clarified here - rose 6.6% to 605,400 vehicles through the first half of 2014. That was slightly better than the overall industry's performance and is a glimmer of hope in Europe where auto sales dropped to a two-decade low in 2013. 

One factor that bodes well for investors hoping Ford turns a profit sooner rather than later, is that its sales mix continues to improve. Last month Ford's retail and fleet sales were 73% of its total sales, which is 300 basis points better than last year's June and 500 basis points better than the industry average. That simply means Ford's focus on retail and fleet, rather than daily rental sales, makes each sale more valuable.

Ford's new transit van is increasing its commercial sales. Source: Ford Motor Company

"The pricing environment in Europe remains extremely competitive," said Stephen Odell, president, Ford of Europe, Middle East and Africa, in a press release. "But our sales are growing on the strength of our new vehicle line-up, and we continue to beat the industry average in higher value sales channels - retail, fleet, and commercial vehicle sales."

In addition to Ford's sales mix improving toward more profitable consumers, the automaker's sales should get a boost as its newer vehicle models hit the pavement.

During the first six months of 2014 more than 52% of Ford's sales were of all-new or significantly refreshed vehicles. That's good news for investors as each newer model is typically more profitable because it's loaded with new features and technology.

In fact, it's all really a virtuous cycle. As sales improve, more capital is spent to develop newer vehicle models which generate more consumer foot traffic at dealerships, which increases sales. Because Ford's newer vehicles are selling well, it has helped increase dealership profits, up 50% in the first half of 2014 compared to last year, according to Ford. With dealership profits rising it will enable them to invest in upgrades and building remodels to improve customer experience and overall appearance.

Since Ford laid out its turnaround strategy for Europe in 2012 it has launched 15 new or significantly refreshed vehicles and has more due out in the back half of 2014. One of the new vehicles on the way is Ford's Focus, which remains a very critical vehicle for the automaker's European sales.

Graph by author. Information source: Ford Motor Company 

Also on the way is Ford's Mondeo, known in the United States as the Fusion, which has the potential to be a big-hit in Europe.

Bottom line
America's second-largest automaker is set to report second-quarter results later this month and one of the biggest points of interest will be Ford's pre-tax results in Europe. Since the beginning of 2012 Ford has lost $3.5 billion dollars in Europe. Had the company simply broke even last year it would have added roughly $0.40 of net income per share, a boost of nearly 23%.

Investors are hoping Ford's focus on a better sales mix and newer vehicles will aid profitability in a region that has drained profits for years. Ford is confident it will break even or turn a profit in Europe in 2015 which will be a huge win for investors. 

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