Ford Motor Co. (F) posted a profit of $2.64 billion or 65 cents per share in the second quarter of the year, a $67 million or 2.5% decline from $2.70 billion or 68 cents per share in the corresponding quarter of 2010. However, the company fared better than the Zacks Consensus Estimate of 60 cents per share.
The decline in profit resulted from an anticipated slump in Financial Services results. The automaker has already cautioned its investors in the near past about the non-recurrence of lower lease depreciation expense and lower credit loss reserve reductions in 2011 compared with 2010. It revealed that these two items are expected to reduce the company’s profit by $1.1 billion in 2011 on a year-over-year basis.
Revenues in the quarter appreciated 13% to $35.5 billion, driven by higher revenues from the Automotive segment. It exceeded the Zacks Consensus Estimate of $31.8 billion.
In the first half of the year, Ford’s U.S. total market share was 16.7% in the U.S. and 8.4% in the Europe.
Ford Automotive
The Ford Automotive segment witnessed a 16% increase in revenues to $33.5 billion. Total vehicle wholesaled were 1.52 million units during the quarter, up 101,000 units from 1.42 million units in the second quarter of 2010.
The pre-tax operating profit increased to $2.28 billion from $2.07 billion a year ago. The improvement reflected higher net pricing, favorable volume and mix in North America, and lower net interest expense. Lower net interest expense was attributable to debt repayments made since the beginning of second quarter 2010.
In North America, revenues escalated 15% to $19.5 billion. The region showed a marginal rise in pre-tax operating profit to $1.91 billion from $1.90 million a year ago. The improvement was attributable to improvement in net pricing and favorable volume and mix, mostly offset by higher costs, particularly for new products, as well as higher commodities and structural costs.
In South America, revenues scaled up 11.5% to $2.9 billion. Pre-tax operating profit in the region declined to $267 million from $285 million a year ago. Higher net pricing in the region was more than offset by higher commodities structural costs due to domestic inflation.
In Europe, revenues rose 20% to $9.0 billion. Pre-tax operating profit slashed to $176 million from $322 million a year ago, driven by higher commodities and structural costs.
In Asia-Pacific & Africa, revenues grew 17% to $2.1 billion. Pre-tax operating profit plummeted to $1 million from $113 million a year ago. The decline in profit was attributable to higher costs and unfavorable product-line and market mix.
Ford’s Other Automotive – consisting primarily of interest and financing-related costs – revealed a narrower pre-tax loss of $76 million in the quarter compared with $551 million a year ago. The improvement primarily reflects lower net interest expense due to significant debt reduction actions.
Financial Services
Revenues in the Financial Services segment dipped to $2.0 billion from $2.5 billion a year ago. The segment reported a decrease in pre-tax operating profit to $602 million from $875 million in the previous year quarter.
Ford Credit showed a fall in pre-tax operating profit to $604 million from $888 million a year ago due to a fall in credit loss reserve reductions and the non-recurrence of low lease depreciation expense as seen in 2010.
Financial Position
Ford had cash and marketable securities of $22.0 billion as of June 30, 2011, a marginal improvement from $21.9 billion a year ago. Total Automotive debt fell $2.6 billion to $14 billion while Automotive gross cash totaled $22 billion as of the above date.
The net reduction in debt includes $2.3 billion of payments on term loans and full repayment of the outstanding balance of $800 million on the company’s revolving credit line. However, these were offset partially by an increase in low-cost loans to support advanced technology.
In the first half of 2011, the company’s Automotive operating-related cash flow improved to $4.5 billion from $2.5 billion. Capital expenditures increased to $2.0 billion from $1.9 billion a year ago.
Guidance
For the upcoming quarter, Ford expects production to be about 1.4 million units, up 92,000 units from a year ago, reflecting strong demand for its products.
For full year 2011, Ford reiterated its industry volume (including medium and heavy trucks) forecast of 13 million units–13.5 million units for the U.S. market. However, it has lowered its industry volume guidance for the 19 European markets to 14.8 million units–15.3 million units from 14.5 million units–15.5 million units due to signs of weakness related to the debt crisis and fiscal austerity programs.
Ford continues to expect 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. The automaker has also reiterated its capital expenditures guidance of $5 billion–$5.5 billion for the full year.
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).
We eagerly wait to see Ford’s arch rival, General Motors' (GM) performance in the quarter with the release of its results on August 4, 2011.
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