Ford Motor Co. (F) flashed its first quarter 2011 earnings with a roaring 48% rise in profit to $2.61 billion from $1.76 billion in the same quarter of 2010. On earnings per share basis, profits rose 35% to 62 cents per share from 46 cents per share a year ago, thereby topping the Zacks Consensus Estimate by 12 cents per share.
This is a turnaround performance with respect to the fourth quarter of 2010, when the automaker recorded a 24% fall in profit. However, the company did not deprive their stockholders from enjoying a profit for seven straight quarters after years of losses. In fact, it posted a profit during the quarter that was the best since the same quarter in 1998.
The credit goes undoubtedly to the company’s One Ford plan, which relies on fuel-efficient lineups, continued investment in global assets, efficient management and strengthening of core businesses, which has offset the negative impact from not-so-favorable economic condition as well as earthquake and tsunami in Japan. We have seen Ford to be among the last major automakers to announce production shutdowns due to the natural disaster in Japan.
Total revenue during the quarter escalated 18% to $33.1 billion, surpassing the Zacks Consensus Estimate of $30.5 billion. The increase in revenues was attributable to a 12% rise in sales to 1.40 million vehicles. In March, the automaker topped General Motors (GM) for the second time since 1998.
During the quarter, the seasonally adjusted annual rate of sales was 13.4 million in the U.S. and 15.9 million units for the 19 markets that Ford captures in Europe. These led to a market share of 16% in the U.S. and 8.5% in Europe.
Ford Automotive
Ford Automotive segment depicted a 22% rise in revenues to $31 billion on higher unit sales. The segment pre-tax operating profit improved exceptionally in North America and Europe.
Total pre-tax operating profit increased a whopping 78% to $2.13 billion. Thanks to the favorable volume, mix and net pricing that more than offset higher contribution costs, which include material costs, warranty expense and freight and duty costs.
The higher material costs resulted from added content in the vehicles as well as technology and features for Ford’s new products. In the quarter, Ford’s structural costs went up $400 million and commodity costs increased by $300 million from the first quarter of 2010.
In North America, revenues swelled 27% to $17.9 billion. Pre-tax operating profit in the region increased to $1.8 billion from $1.2 billion a year ago due to favorable volume, mix and net pricing. These were offset partially by higher contribution costs, primarily material costs to support new products, as well as increases in commodity, warranty and freight and duty costs.
In South America, revenues scaled up 15% to $2.3 billion. Pre-tax operating profit in the region rose to $210 million from $203 million in the first quarter of 2010. The increase reflected favorable net pricing, volume and mix, offset substantially by higher costs and unfavorable currency exchange rate.
In Europe, revenues improved 13% to $8.7 billion. The region had an operating profit of $293 million, significantly up from $107 million a year ago on the back of favorable net pricing, volume, mix, and exchange rate as well as higher subsidiary profits.
In Asia-Pacific & Africa, revenues soared 31% to $2.1 billion. Pre-tax operating profit increased to $33 million from $23 million a year ago, which was explained by lower contribution costs.
Ford’s Other Automotive – consisting primarily of interest and financing-related costs – showed a narrower pre-tax loss of $249 million in the quarter compared with $391 million in the prior year-quarter, which was attributable to lower net interest expense, offset partially by unfavorable changes in fair market value adjustments related primarily to Ford’s investment in Japan’s Mazda Motor.
Financial Services
Ford’s Financial Services segment disappointed during the quarter. The segment reported a 13% fall in pre-tax operating profit to $706 million from $815 million in the previous year-quarter. Ford Credit registered a 14% dip in pre-tax operating profit to $713 million from $828 million a year ago. The decline was a fall out of lower market valuation adjustments to derivatives and lower receivables volume.
Financial Position
Ford had cash and marketable securities of $21.4 billion as of March 31, 2010, a decline from $25.3 billion in the corresponding period a year ago. Automotive Gross cash was $21.3 billion as of the above date.
However, the company improved its debt position during the quarter. Its Automotive debt has been reduced by $2.5 billion to $16.6 billion, including the redemption of outstanding Trust Preferred Securities. As a result, Automotive gross cash, net of debt, amounted to $4.7 billion, an improvement from $3.3 billion at the end of 2010.
In the quarter, the company’s Automotive operating-related cash flow improved $2.3 billion on a year-over-year basis to $2.2 billion, primarily driven by higher profit. Meanwhile, capital expenditures remained unchanged at $900 million compared with the prior-year quarter.
Outlook
Ford anticipates production of 1.5 million units in the second quarter, up 12,000 units from a year ago, reflecting continued strong demand for its products. We appreciate Ford’s higher production guidance given the parts shortage globally on the back of earthquake and tsunami in Japan.
For full year 2011, Ford reiterated its industry volume (including medium and heavy trucks) forecast of 13 million – 13.5 million units for the U.S. market and 14.5 million – 15.5 million units for the 19 European markets covered by it.
Ford expects commodity costs and structural costs to increase by $2 billion from 2010 in order to support higher volumes in the short term as well as expand and improve its lineups. It expects capital expenditures in the range of $5 billion to $5.5 billion for the full year.
Ford expects profits at Ford Credit in 2011 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. These two items are expected to reduce the profit by $1.1 billion in 2011 on a year-over-year basis.
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. We are also disappointed with the company’s Financial Services segment results.
As a result, the company retains a Zacks #3 Rank on its stock, which translated to a short-term (1 to 3 months) rating of Hold. Consequently, we reiterate our long-term recommendation of “Neutral” for the long term (more than 6 months).
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