Bloomberg News

Ford Declines as Commodity-Hedge Losses Trim Profit Margins

October 26, 2011

(Updates with Ford comments in fourth paragraph.)

Oct. 26 (Bloomberg) -- Ford Motor Co. fell the most in more than two months after the second-biggest U.S. automaker lowered its automotive operating margin forecast because of losses on commodity contracts.

Declining metals prices in late September, including drops of 25 percent for copper and 14 percent for aluminum, prompted Ford to write down the value of hedges by about $350 million, said Todd Nissen, a company spokesman. Ford fell 4.5 percent to $11.87 at the close in New York.

The margin may fall this year to 5.7 percent from 6.1 percent last year, mainly because of the hedging losses, the company said. The forecast was included with today’s report showing third-quarter net income slipped 2.3 percent to $1.65 billion from $1.69 billion in the year-earlier period.

“This has been a tough year from the perspective of commodity cost increases,” Lewis Booth, Ford’s chief financial officer, said today on “The Hays Advantage” on Bloomberg Radio. “We’d have liked to have met our guidance to equal or improve our operating margin, but it’s a minor blip, not a major issue.”

Excluding one-time items, the profit was 46 cents a share, beating the 44-cent average of 17 analysts estimates compiled by Bloomberg. The Dearborn, Michigan-based automaker said it is still weighing when to resume paying a dividend.

Ford ‘Delivered’

“The company has delivered on what they’ve promised and yet the stock hasn’t kept up,” said Gary Bradshaw, a fund manager at Dallas-based Hodges Capital Management, who owns about 250,000 Ford shares. “I’m hanging tough, but it is painful.”

The division’s operating margin was 6.5 percent in this year’s first nine months. The losses on the hedges may be reversed over the next 18 months if prices rise again, Booth said.

Ford earlier dropped 7.2 percent to $11.54 for the biggest intraday decline since Aug. 8. The shares have fallen 29 percent this year. Last year, they rose 68 percent.

“There was a lot of concern over margins and the effect of rising commodity costs,” Steve Brown, an analyst with Fitch Ratings, said in an interview. “The effect of the hedging was just accounting noise.”

KDP Investment Advisors today cut its profit forecasts for Ford this year and next in a note headlined, “Ford’s Momentum Stalling As Costs & Economies Conspire.” KDP said it now forecasts Ford will earn $10.9 billion this year, before interest, taxes, depreciation and amortization, down from a previous projection of $11.2 billion.

Better 2012

“Higher costs, a potential slow down in Latin America, and ongoing economic concerns in Europe are expected to weigh negatively on results,” wrote Kip Penniman, an analyst at KDP in Montpelier, Vermont. “We believe that Ford will turn more shareholder friendly in 2012 and institute a modest dividend.”

The automaker now expects to spend $2.2 billion more on commodities than last year, up from an earlier forecast of $2 billion. Ford enters into forward contracts to lock in prices of certain commodities. When spot prices fall below the agreed-upon price, the company takes a writedown on those contracts.

“This is accounting,” Booth said in an interview. “The reason we do these hedges is to protect our cash flow. The profit volatility is an accounting issue, which obviously makes it hard for people to understand our profits.”

Structural costs for developing new models will rise $1.6 billion this year, lower than its previous forecast of about $2 billion, Ford said.

Fuel Efficiency

Chief Executive Officer Alan Mulally has revived the automaker by focusing on fuel economy, including SUVs such as the redesigned Ford Explorer that has boosted its efficiency by about 30 percent. Explorer sales have more than doubled this year and Ford’s U.S. utility vehicle sales rose 29 percent in the third quarter, according to the automaker. SUVs and pickups accounted for 68 percent of Ford’s U.S. sales during the period.

Ford’s third-quarter sales rose 14 percent to $33.1 billion as Ford boosted North American production by 12 percent to 656,000 cars and light trucks, fueling the second-biggest third- quarter profit in the company’s 108-year history. Automakers count revenue when vehicles are sent to dealers. The average of 11 analysts’ estimates was for revenue of $30.5 billion.

Ford increased its forecast for fourth-quarter North American production to 660,000 cars and trucks from its previous plan to build 645,000 vehicles.

Buyers Pay More

Ford’s U.S. auto sales rose 11 percent through September this year, outpacing the industry’s 10 percent gain, according to Autodata Corp. The automaker’s U.S. market share improved to 16.8 percent from 16.7 percent, according to the Woodcliff Lake, New Jersey-based researcher.

Buyers of Ford cars and trucks paid an average of $32,945 per model in September, up 20 percent from five years ago, according Edmunds.com. Explorer buyers paid an average of $38,108 per model, the highest since the Santa Monica, California-based researcher began tracking prices in 2002.

The new Explorer had below-average reliability in its first year, Consumer Reports magazine said yesterday. The Ford brand slid to 20th among 28 auto brands, from 10th last year, the magazine said in a release.

“That is a bit of a black mark that could have an effect on sales,” Fitch’s Brown said. “It’s something we’re certainly going to watch.”

New UAW Contract

Ford last week won ratification of a new contract with its 40,600 U.S. hourly workers that it said will raise labor costs less than 1 percent annually. The deal contains no raise for senior workers nor a cost-of-living pay increase. Ford promised to create 12,000 jobs by 2015, mostly for workers making $15.78 an hour. Senior employees make roughly $28 an hour.

The new contract with the United Auto Workers allows Ford to “maintain the highly competitive position” it has in North America, Bruce Clark, managing director with Moody’s Investors Service, said yesterday in a statement.

“They also are gaining greater flexibility to respond to economic downturns,” Clark wrote. Ratification of the contract “removes one key hurdle to potential rating improvement.”

About $280 million in signing bonuses and other costs related to the contract will be charged in the fourth quarter, Booth told reporters today.

“In both Europe and North America, we’ve made huge restructuring actions,” Booth said. “That’s the reason we’re having good, solid profits in a still relatively weak industry.”

Credit Ratings

Moody’s has said it is reviewing ratings on the automaker, which fell to so-called junk status six years ago. Standard & Poor’s raised Ford’s credit rating two levels to BB+, the highest non-investment grade, on Oct. 21, saying the new contract will not impede profitability or cash generation. Fitch Ratings upgraded Ford to BB+ from BB on Oct. 20, and assigned a positive outlook.

“We can make rating changes whenever we want,” Fitch’s Brown said. “The likelihood is greater than not that our next move would be an upgrade. We want to see a continuation of the policies the company has been following.”

Borrowing costs are already improving, Booth said.

Ford reported $20.8 billion in automotive cash on Sept. 30, down from $22 billion on June 30. Ford had automotive debt of $12.7 billion, down from $14 billion on June 30.

Ford has more debt than rivals because it borrowed more than $23 billion in late 2006, before credit markets froze. That allowed Ford to avoid the 2009 bailouts and bankruptcies that befell the predecessors of General Motors Co. and Chrysler Group LLC, now majority owned by Fiat SpA.

Capital Spending

Capital spending this year will be $4.6 billion, less than the $5 billion to $5.5 billion Ford had forecast. It isn’t cutting investments in new plants or products, Booth said.

“We’re just continuing to generate greater efficiencies,” Booth said.

Ford earned $9.28 billion in the past two calendar years, as new models such as the Fiesta subcompact and stalwarts such as F-series pickups attracted buyers. From 2006 through 2008, Ford lost $30.1 billion as a collapse in SUV sales was followed by the most severe recession since the Great Depression.

Ford has now earned a net profit in 10 straight quarters. On a net basis, the automaker earned 41 cents per share. Ford’s net income included unfavorable special items of $98 million, which included costs for personnel reductions, and “dealer- related actions,” including ending its Mercury brand, the company said.

No Dividend Yet

Ford has said it is considering resuming paying a dividend, which it suspended in September 2006, the month Mulally joined Ford from Boeing Co. The automaker may pay a quarterly dividend of 8 cents a share early next year, said Brian Johnson, a Chicago-based analyst with Barclays Capital, who rates Ford “overweight.”

Restoring the dividend isn’t dependent upon Ford achieving an investment-grade credit rating, Booth said Oct. 20, adding that shareholders have been “very patient.”

There’s “no news” yet on such a move, Booth told reporters today. When Ford pays a dividend, it won’t be a “token” amount, Booth said in response to a question.

“You can expect us, when we do start, to start relatively cautiously,” Booth said of restoring the dividend. “Once we start, it’s key to our shareholders that we can maintain a sustainable level of dividend.”

--With assistance from Kathleen Hays in New York. Editors: Jamie Butters, Bill Koenig.

To contact the reporter on this story: Keith Naughton in Dearborn, Michigan, at knaughton3@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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