Sunday, July 29, 2012

Ford 2QF2012 Performance

Quarterly Performance
Second quarter profit fell y/y 57% to $1 billion, largely influenced by operations in Europe. EPS was $0.26, down from $0.59 a year earlier. This was expected, after Ford increased its 2011 estimated losses (to $1 billion, up from roughly $500 million) for Europe in June. Management cited that sales are at a 20 year low due to economic uncertainty in the Eurozone. Europe accounts for 25% of Ford’s total sales & European automotive market share fell to 7.7% from 8.3% a year earlier, driven by losses in the southern European markets. Shares fell 1% at the close to $8.97 to their lowest since December 9th, 2009. Investors aren’t willing to bet on the turnaround story that many analysts are betting on, with price targets in the $10-16 range.
            To offset the losses, Ford is decreasing production, cutting advertising budgets, and laying off workers in Europe. Management failed to provide a long term restructuring plan for the area, which weighed on shares. Ford currently uses 63% of its production capacity in Europe, so factory closings in Europe are expected—similar to downsizing in North America in the past decade.
            CFO Bob Shanks: “In North America, we had to shrink in order to grow, but if we think about Europe, I don’t think that’s where our business is. Our intent is not to shrink, our intent is to grow our business in Europe.”
            Ford’s U.S. car and light-truck sales rose 6.6% in the first half of the year, trailing the industry by roughly 900 bps. Commercial and passenger vehicles rose 18% in China last month. Ford is still expanding into China & will open nine new factories by 2015. Sales seem to be strong, even though Ford was a late mover in this market.

Forward Looking
            We continue to hold onto the Ford shares because we believe the stock is oversold on Eurozone & China GDP concerns. These negatives should continue to be offset by strong performance in North America—record 1st half profits in 2012, driven by strategic pricing and cost savings. U.S. Sales of pickup trucks (F-series) in the U.S. have rebounded in the past two years, in lieu of a housing recovery. Pickup truck sales should bounce back as new housing starts shows consistent improvement. Guidance (ex-Europe) was in line for the second quarter, with slightly better revised 2012 outlook. The Escape Fusion is set to launch in the second half of 2012, which could be a catalyst as well.

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