Ford Motor Co. (F) posted a $66 million or 3.5% fall in profit to $1.85 billion in the third quarter of the year from $1.91 billion in the same quarter of prior year. However, on per share basis, earnings were 46 cents versus 48 cents a year ago, beating the Zacks Consensus Estimate of 44 cents.
The decline in profit was attributable to fall in commodity prices and anticipated reductions in Financial Services results.
Total revenues went up $4.1 billion or 14.1% to $33.1 billion. This compared with the Zacks Consensus Estimate of $29.8 billion.
Ford Automotive
The Ford Automotive segment witnessed a 16.5% increase in revenues to $31.1 billion. Pre-tax operating profit was $1.34 billion, an increase of $45 million from $1.29 billion in the third quarter of 2010.
The rise in operating profit was driven by higher net pricing in each Automotive operations, lower net interest expense, and favorable volume and mix in North and South America. These were partially offset by higher contribution costs, which include material costs, warranty expense, as well as freight and duty costs. About two-third of the contribution cost increase was attributable to commodities.
In North America, revenues appreciated 11.1% to $18.0 billion. The region recorded a flat pre-tax operating profit of $1.6 billion during the quarter. Higher net pricing and favorable volume and mix in the region were more than offset by higher contribution costs.
In South America, revenues escalated 20% to $3.0 billion. Pre-tax operating profit in the region was $276 million compared with $241 million a year ago. The increase in profit was attributable to favorable net pricing, volume and mix, and other profits, offset partially by higher structural costs.
In Europe, revenues increased 25.8% to $7.8 billion. The region had an operating loss of $306 million compared with a $196 million a year ago. The higher loss reflected higher commodity costs, including hedging adjustments, as well as unfavorable exchange rate, partially offset by lower structural costs.
In Asia-Pacific & Africa, revenues grew 27.8% to $2.3 billion. The region saw a pre-tax operating loss of $43 million in sharp contrast to a profit of $30 million a year ago. The lower earnings resulted from higher costs, unfavorable volume and mix, and unfavorable exchange, partially offset by higher net pricing.
Ford’s Other Automotive – consisting primarily of interest and financing-related costs – showed a pre-tax loss of $138 million, an improvement of $231 million from the year-ago level. The improvement was attributable to lower net interest expense.
Financial Services
The Financial Services segment reported a 20.5% fall in pre-tax operating profit to $605 million from $761 million in the previous year. Ford Credit saw a 24.2% decrease in pre-tax operating profit to $581 million from $766 million a year ago.
The decrease in pre-tax profit was attributable to fewer leases being terminated and the related vehicles sold at a gain, as well as lower credit loss reserve reductions.
Financial Position
Ford had cash and marketable securities of $20.8 billion as of September 30, 2011, a decline from $23.9 billion in the corresponding period a year ago.
Ford reduced its Automotive debt by $1.3 billion to $12.7 billion as of the above date. This reduction in debt included payment of the remaining $1.8 billion balance of secured Term Loan, which was partially offset by an increase in low-cost loans to support advanced technology.
In the first nine months of 2011, the company’s cash flow from continuing operations was $6.8 billion compared with $4.6 billion. Capital expenditures increased to $3.1 billion in the period under study from $2.8 billion in the same period of 2010.
Outlook
Ford expects full year industry volume in the U.S. to be 13 million units compared with the previous guidance of 13 million–13.5 million units. For the 19 markets covered by Ford, industry volume is expected to be 15.2 million units compared with the previous guidance of 14.8 million–15.3 million units.
Ford expects structural costs to be $1.6 billion for 2011, which is higher than 2010. As a result of the recent hedging adjustments, Ford expects commodity costs to be $2.2 billion, which is also higher than 2010.
The company expects its full-year Automotive operating margin to be 5.7% compared with 6.1% in 2010. The lower margin is primarily due to the impact of commodity hedging adjustments.
It expects capital expenditures to be $4.6 billion in 2011, as the company realizes efficiencies from its global product development processes.
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 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).
Ford’s archrival, General Motors Company (GM) will release its third quarter results on November 9, 2011.
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