Ford Profits Could Fall as It Invests for Future Gains
Launching the F-150 Has Been Expensive for Ford
The profit pressures that Ford is facing in North America are short-term, and they might best be thought of as investments in the future rather than costs.
The biggest factor weighing on Ford's North America earnings is the huge costs related to the launch of the company's new 2015 F-150 pickup. With its new truck, Ford switched from steel to aluminum for its body panels, a weight-saving move intended to improve the new truck's fuel economy and towing capacity.
The move worked -- the new truck does indeed sport better towing capacity and fuel economy than its predecessor. But it's an expensive move, requiring elaborate and time-consuming changes to Ford's two truck factories that have resulted in a loss of about 90,000 units of production.
Production of the new trucks won't be up to speed until late spring, Ford says. Short supplies have limited Ford's truck sales, a concern given that the F-150 and its Super Duty siblings are Ford's most profitable products.
The upshot? Squeezed profits in the short term. Ford North America chief Joe Hinrichs said in September that his business unit's profit margin would be "at the low end" of the 8 percent to 9 percent range in Ford's official guidance. That's a big drop from the 11.6 percent operating profit margin it reported in the second quarter -- and a clear signal that Ford expected much of the squeeze to come at the end of 2014.
Ford Faces Challenges in South America and Europe
Meanwhile, Ford is facing challenges in two of its overseas business units. In South America, economic slowdowns in Brazil and other key markets led Ford to warn that the unit would lose $1 billion in 2014, as new-car sales across the industry have slowed sharply.
Ford is also facing a difficult road in Venezuela, where currency controls imposed by the government have hampered Ford's ability to pay its local suppliers. Last week, Ford said in an SEC filing that it expected to take a one-time charge of about $800 million to account for its business in Venezuela, which is effectively frozen for the time being.
Ford Europe is also facing challenges. New-car sales in Russia have dropped sharply on economic concerns. That has hurt Ford more than most, as the Blue Oval has made big investments in Russia in anticipation of long-term growth. Ford has had to lay off workers and reduce production significantly.
The good news for Ford in Europe is that cost reductions and an expanded product line have helped improve results in much of the rest of the region. The upshot will likely be a big loss for 2014, in the neighborhood of $1.2 billion, but a much smaller loss in 2015.
A Lower Profit for 2014, to Set Up a Higher One in 2015
Based on Ford's own guidance, investors should expect a pretax profit of about $800 million in the fourth quarter, and about $6 billion for all of 2014.
That's down significantly from the $8.6 billion in pretax earnings that Ford posted for 2013. But it reflects the costs of Ford's major investments in new products, particularly the new F-150, and the costs of its work to ensure longer-term profitability in its overseas business units.
All of that spending should set the company up very well for 2015. Ford's most recent guidance indicated that the company expects to post a profit between $8.5 billion and $9.5 billion for 2015. If that guidance holds, Ford investors should be well rewarded for their patience through a costly 2014.
Motley Fool contributor John Rosevear owns shares of Ford. The Motley Fool recommends 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.