Ford Slips, Shows Yearlong Strength - Analyst Blog

Ford Motor Co. (F) posted a 24% fall in profit to $1.2 billion or 30 cents per share (before special items) in the fourth quarter of 2010 from $1.58 billion or 43 cents per share (before special items) in the same quarter of 2009. With this, the automaker has missed the Zacks Consensus Estimate by 19 cents per share.

The decline in profit was attributable to lower year-over-year revenues generated by the company's automotive operations as well as the financial arm. Total revenue during the quarter ebbed 7% to $32.5 billion. However, excluding revenues from Volvo, sales improved by $1.6 billion or 5% from the fourth quarter of 2009.

Ford Automotive                    

The Ford Automotive segment registered a 5% decline in revenues to $30.3 billion during the quarter. Excluding sales of Volvo cars in 2009, revenues went up 8%.

The pre-tax operating profit decreased $173 million to $741 million during the quarter, driven by higher structural and commodity costs as well as unfavorable volume and mix.. The structural costs were higher in order to support volume growth and product development plans of the company.

In North America, revenues escalated 10% to $17.2 billion. The region recorded a rise in pre-tax operating profit to $670 million from $611 million a year ago, reflecting favorable net pricing, higher industry volume, favorable mix, market share improvements and favorable exchange rate movements.

These were offset partially by the absence of stock increases similar to that of prior-year, higher structural costs to support product launches and growth, higher commodity costs and costs associated with the recently announced Windstar minivan recalls.

In South America, revenues appreciated 8% to $2.8 billion. Pre-tax operating profit in the region declined to $281 million from $369 million in 2009. The decrease was attributable to higher commodity and structural costs, offset partially by favorable net pricing.

In Europe, revenues slipped 1.2% to $8.1 billion. The region had an operating loss of $51 million in sharp contrast to a profit of $253 million a year ago. The deterioration in earnings reflected lower market share, higher structural costs, higher commodity costs and lower industry volume, offset partially by favorable exchange and mix.

In Asia-Pacific & Africa, revenues soared 29% to $2.2 billion. Pre-tax operating profit rose to $23 million from $16 million a year ago. The increase in profit reflected higher volume, offset partially by unfavorable mix.

Ford's Other Automotive – consisting primarily of interest and financing-related costs – showed a narrower pre-tax loss of $182 million in the quarter compared with $295 million in the prior year-quarter, which was explained by favorable fair market value adjustments related primarily to the company's investment in Mazda Motor and lower net interest expense.

Financial Services

The Financial Services segment reported a 15% dip in pre-tax operating profit to $552 million from $701 million in the previous year-quarter. Ford Credit recorded a 20% fall in pre-tax operating profit to $572 million from $714 million a year ago.

The decline was a fallout of lower volume and the non-recurrence of lower lease depreciation expense related to lower gains as fewer leases were terminated and the vehicles sold.

Annual Results

For full year 2010, Ford boasted of a profit of $7.58 billion or $1.91 per share (before special items), which is a record in more than 10 years led by strong performance in North America, reflecting favorable volume, mix and pricing, as well as better performance by Ford Credit. It compared with a profit of $19 million or one cent per share in 2009. However, the company's profit failed to meet the Zacks Consensus Estimate of $2.09 per share.

Ford Automotive recorded a $7.2 billion improvement in pre-tax operating profit to $5.3 billion, driven by strong performance in North America.

Meanwhile, Ford Credit reported a pre-tax operating profit of $3.1 billion versus $2 billion in 2009. This was attributable to a lower provision for credit losses and lower depreciation expense for leased vehicles related to higher auction values, offset partially by lower volume and the non-recurrence of net gains related to unhedged currency exposure from inter-company lending.

Due to the commendable results, Ford has agreed to pay $5,000 (on the average) to each eligible full-time employee as profit sharing scheme to approximately 40,600 eligible U.S. hourly employees.

Financial Position

Ford had cash and marketable securities of $20.5 billion as of December 31, 2010, a decline from $24.9 billion a year ago. Total Automotive debt stood at $19.1 billion as of the above date.

In 2010, the company's Automotive operating-related cash flow was $5.2 billion to $4.4 billion, driven by higher profit. Capital expenditures fell $100 million to $3.9 billion in the same year.

Outlook

For full year 2011, Ford expects industry volume (including medium and heavy trucks) of 13 million units–13.5 million units in the U.S. and 14.5 million units–15.5 million units in the 19 European markets covered by it.

In 2010, Ford continues to expect its structural costs in the Automotive division to be higher on a year-over-year basis in order to support higher production and new investments.

The company also anticipates commodity costs to be higher on the back of magnified global demand. Capital expenditures is expected in the range of $5 billion to $5.5 billion as the company continues to invest in its product and growth plans

For 2011, Ford expects profits at Ford Credit to be lower than 2010 due to the non-recurrence of lower lease depreciation expense and that of reductions in credit loss reserve of the same magnitude as in 2010.

Our Take

We appreciate Ford's product plans and debt reduction strategy. The benefits from these strategies have already been reflected in the company's results. However, we are concerned about the company's higher structural and commodity costs. As a result, the company retained a Zacks #3 Rank on its stock, which translated to a short-term (1–3 months) rating of Hold.

 
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