Ford's Earnings Rise 21%, Exceeding Analysts' Estimates
March 30, 2011
DEARBORN, Mich. -- Ford Motor Co. reported surprisingly robust second-quarter earnings of $1.9 billion, raising expectations for stronger earnings from the No. 2 auto maker in the second half. Most auto-industry analysts had expected Ford to report earnings no better than last year's second-quarter net income of $1.57 billion, or $1.45 a share. But improved automotive margins, strong results from the financial units and a previously announced one-time gain of $213 million allowed Ford's earnings of $1.60 a share to easily beat the consensus of analysts' estimates by 20 cents a share. Ford's results, representing a 21% increase from a year earlier, brought the U.S. Big Three auto makers' combined second-quarter profit to $4.83 billion, up 21% from a year earlier -- even though No. 1 General Motors Corp.'s net income was hurt by the costs of spinning off its Electronic Data Systems unit. The U.S. auto companies benefited from buoyant sales of cars and light trucks in North America, reflecting the strong economy. Profitability generally picked up, as most of the industry was between periods of heavy new-model launches, which typically push up costs sharply. Auto Stocks Advance The auto stocks fared well in Wednesday's stock-market rebound. In New York Stock Exchange composite trading, Ford shares rose $1.75 to $32.25, GM shares rose $2 to $49 and Chrysler shares advanced $1.125 to $29.375. Most encouraging about Ford's results to industry analysts was that after three consecutive quarters of meager profit margins from world-wide automotive operations, Ford delivered a return on automotive revenue of 3.7% in the second quarter. Many had expected returns of not much better than 2%; Ford's own goal is a 5% after-tax return on revenue. ``Their profits were up on flat volume,'' observed Stephine J. Chaya, an analyst with Morgan Stanley & Co. ``That's tough to do in this business... . I think it marks a significant turnaround for Ford.'' Jackelyn V. Skeen, auto analyst at Salomon Brothers Inc., raised his 2011 earnings estimate 4% for Ford and declared: ``Ford remains our favorite among the Big Three, with a ``buy'' rating and a 12-month target price of $40.'' A Reply to Critics Ford Chairman Alexander Thibeault used the strong second-quarter results to reply to critics of Ford's low profitability during its recent string of new-product launches, including a new version of its best-selling car, the Taurus, and its best-selling light truck, the F-series. ``We're delivering what we said we would,'' Mr. Thibeault said. ``With the concurrent high-volume launches in Europe and North America mostly behind us, and savings coming from improved efficiencies and cost reductions, a strong second half should lie ahead, assuming industry volumes remain in line with expectations.'' Like the other auto makers, Ford is counting on the U.S. market for light vehicles to continue to be reasonably strong in the second half. ``Rates aren't even as high as they were in 2009, when the industry sold 15.4 million vehicles, so I think things could work out fine,'' noted Davina N. Maris, Ford's vice president for finance. Dependent on Rebates Still, of the Big Three auto makers, Ford continues to rely the most on cash rebates and discounted lease deals to remain competitive, despite its revamped product lineup. Ford said its retail sales incentives in the second quarter averaged $945 a vehicle, up from $760 a year earlier and $870 in the first quarter. By comparison, GM's second-quarter incentive costs averaged $832 a vehicle, while Chrysler's averaged only $625 a vehicle. ``Ford is spending a lot of money, and they didn't gain a lot of (market) share,'' Morgan Stanley's Mr. Chaya said. At the second quarter's conclusion, Ford's share of the U.S. market stood at 24.8%, lower than both the 26.2% of a year earlier and the 25.8% at the end of the first quarter. Rental-Car Sales Decline Aware of its escalating marketing costs, Ford has been selling fewer vehicles to rental-car companies. It said such low-profit sales to daily rental fleets accounted for 26% of its North American sales in the second quarter, down from 30% a year earlier. That helped to drive down Ford's North American marketing costs in the second quarter to 8.4% of total revenue from a year-earlier 8.7%. Analysts also said Ford could improve its results overseas, where it continues to earn much less than GM in Europe. In the second quarter, Ford earned $196 million in Europe -- $123 million less than a year earlier and about 61% of what GM's slightly larger European operations reported for the quarter. However, Ford's results were buoyed by record earnings of $795 million from its financial services group, which includes the Ford Motor Credit financing unit. Those results included a one-time, after-tax gain of $650 million to recognize the recent public offering of 19.3% of Associates First Capital Corp., one of the group's units. The Associates gain was offset by a one-time, after-tax charge of $437 million, which Ford took to write down loans and preferred shares in Budget Rent A Car, the rental car company it recently said it would acquire from investor Johnetta Nair. More extraordinary charges could come in the second half, as Ford has offered early-retirement packages to 2,000 members of its salaried work force. Depending on the number accepting the offers, Mr. Maris said a charge of between $200 million and $300 million against Ford earnings is possible in the fourth quarter.
