Ford Motor Co. (F), earning its heftiest profits ever in North America, is pumping money back into operations to counter new pickups from competitors and a growing currency advantage for Japanese automakers.
Profit in Ford’s home region surged to a record $2.4 billion in the first quarter, the Dearborn, Michigan-based carmaker said today. Chief Executive Officer Alan Mulally’s plan to fill Ford’s lineup with more competitive cars to complement its pickups and utility vehicles is paying off as the Fusion family sedan and Focus compact make gains.
Heavy spending to sustain that growth, along with restructuring costs in Europe, is keeping some of Ford’s successes from flowing to the bottom line. Among the No. 2 U.S. automaker’s biggest outlays will be on next-generation trucks to take on General Motors Co. (GM:US) and engineering for other models to fend off a weak-yen-bolstered Toyota Motor Corp. (7203)
“We are making those investments to leverage the strength that we have here for even further opportunities where we see them,” Chief Financial Officer Bob Shanks said in an interview. “We want to grow the overall business and have a good, strong margin. If that means there’s a little less spectacular margin from a level that’s already fabulous, that’s fine, because we know that the trade-off is future growth.”
Ford reported net income of $1.61 billion in a statement. Excluding one-time items, the per-share profit was 41 cents, exceeding the 37-cent average estimate of 17 analysts surveyed by Bloomberg. The result compared with net income of $1.4 billion, or 35 cents a share, a year earlier.
Profit in the quarter was weighed down by wider losses in Europe and a deficit in South America triggered by Venezuela’s currency devaluation earlier this year. Another reason was higher spending: capital expenditures rose to $1.5 billion, up 36 percent from $1.1 billion a year earlier.
Structural costs, including spending on engineering, reduced Ford’s automotive profit by $900 million in the first quarter. Mulally, 67, showed an F-150 pickup prototype in January called the Atlas that foreshadowed its future trucks. GM (GM), the largest U.S. automaker, is rolling out revamped Chevrolet Silverado and GMC Sierra pickups this year.
“A number of those structural costs were in the engineering area for new products,” Chief Operating Officer Mark Fields, 52, said today on a conference call. “As we work on our future products, including next-generation F-Series, that’s inherent in those numbers.”
Ford slipped 0.2 percent to $13.33 at the close in New York. The shares have gained 2.9 percent this year compared with an 11 percent increase for the Standard & Poor’s 500 Index.
“It’s hard to get that stock going up,” Gary Bradshaw, fund manager for Dallas-based Hodges Capital Management, which holds about 150,000 shares of Ford, said in a telephone interview. “Ford continues to do the right things, but they continue to have that anchor around their neck in Europe.”
A worsening economic slump from Europe’s debt crisis spurred a $462 million loss in the region during the first three months of the year. Ford reiterated its forecast that its full- year losses in Europe will widen to about $2 billion in 2013 from a $1.75 billion deficit a year earlier.
“We’re still very comfortable with the guidance that we gave in January,” Shanks, 60, told reporters today in Dearborn. “We feel very good about what the team is doing on sort of the top-line, product and brand parts of the plan.”
Part of Ford’s overseas problem is that one of its most successful products is being delayed in Europe. The new Mondeo, which is sold as the Fusion in North America, may reach Europe in late 2014, said Stephen Odell, Ford’s chief for the region.
Ford is restructuring its European operations to try to end losses by mid-decade. The automaker plans to shutter three European factories by 2014, which is leading to disruptions across its plants as production is consolidated.
One of those factories builds the Mondeo, so the redesigned car’s debut is being deferred at a cost of about $200 million, said Adam Jonas, an analyst for Morgan Stanley. The three plant closures will eventually save Ford $500 million a year, he estimates.
Ford introduced the mid-size Fusion late last year, reinforcing a car lineup that includes the Focus, which the company bills as the top-selling global nameplate, citing researcher R.L. Polk & Co. Higher car sales helped pace $33.9 billion in automotive revenue, up 11 percent from a year earlier. First-quarter sales exceeded the $33.6 billion average estimate of 11 analysts.
“Fusion is the star behind these results,” Michelle Krebs, an analyst for auto researcher Edmunds.com, said in a telephone interview. “Ford is gaining strength from new models. They’re not only selling at higher volumes, they’re also getting higher prices.”
Ford forecast that it would boost global production by 13 percent from a year earlier to 1.65 million vehicles. Output may rise to 800,000 vehicles in North America and 390,000 in Europe, up 63,000 and 21,000, respectively. Automakers record revenue when vehicles are assembled and shipped to dealers.
“We expect a mostly neutral reception to 1Q results themselves and a slightly positive reception to the 2Q production guidance,” Ryan Brinkman, an analyst with JPMorgan Chase & Co., said today in an e-mail.
Ford is leading the best lineup of American cars in a generation. GM (GM), Chrysler Group LLC and Ford are turning sedans and small cars into an area of strength to counter a weakening yen that’s giving Toyota (7203) and Honda (7267) an advantage. Japanese automakers are starting to use the weaker yen to position new models more competitively, Shanks said today in the interview.
“To the extent their overall business is benefiting materially from the weaker yen, it just gives them options and flexibility that they didn’t have six, nine months ago.”
The yen has weakened about 20 percent versus the U.S. dollar since Oct. 31 when Prime Minister Shinzo Abe advocated for its decline to aid his country’s economy. Morgan Stanley has estimated the currency boost is about $1,500 per car for Japanese automakers, while U.S. carmakers have put the figure at $5,700 per vehicle.
So far, effects of the yen’s decline aren’t showing up in operating profit for North America, which topped Ford’s previous record of $2.3 billion in 2012’s third quarter. The region’s operating margin was 11 percent, ahead of the company’s full- year forecast of 10 percent in an industry where 5 percent is considered respectable.
Venezuela’s devaluation in February and trade restrictions by Brazil and Argentina dented Ford’s results in South America. The company said it lost $218 million in the region in the first three months of the year, beating its forecast of about $300 million given in March. A year earlier, Ford earned $54 million before taxes in South America.
Ford’s Asia Pacific Africa operations earned $6 million in the quarter after losing $95 million a year earlier. Ford is investing $4.9 billion in China, where it’s trying to catch up with market leaders GM and Volkswagen AG (VOW).
“The question is do you buy Ford now because they’re investing in Asia, and you know that is going to pay off, or does that hold you back?” Hodges Capital’s Bradshaw said. “If you look out a couple of years, Ford looks cheap right now.”
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