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 9^th, 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 1^st 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.