Ford Motors (F) is scheduled to announce its earnings on April 24. The trend in the last few quarters has been somewhat similar. North America has posted solid numbers while Europe has seen huge losses. While this quarter should not be any different, it is the magnitude of the numbers that will decide whether Ford is on the right track or not.
Ford’s North American operating margins were a solid 10.4% in 2012. In the first three months of 2013, Ford’s unit sales in the U.S. are up 11%, outperforming the overall auto market. Moreover, sales of the automaker’s more profitable pickups and SUVs are up almost 12%. The recovery in the U.S. housing market is fueling the growth of pickups, which are used extensively for construction activities. As a result, we expect the Ford’s North American margins to remain strong this quarter.
No Green Shoots in Europe
The European automotive market continues to paint a worrisome picture. Unit sales were down 12% in the first two months of the year. For Ford, it has been a disastrous start to the year with sales plummeting 23.4% through February.
The automaker expects to lose $2 billion in Europe this year, but that was based on the assumption that its market share will remain stable. The fact that it is losing share and the overall market is only performing worse than the initial expectations, $2 billion could easily swell to a bigger number.
South American Blues
Ford recently announced that it expects the South American operating losses to touch $300 million in the first quarter. Volatile government policies combined with currency fluctuations are the reasons cited by the automaker for the sudden jump in anticipated losses. Venezuela’s currency, Bolivar, has devalued more than 30% in the last month alone. To make matters worse, Brazil and Argentina have limited their imports of Ford’s Mexican built Fiesta and Fusion.
Ford’s South American operating profits stood at $213 million in 2012. During the earnings call for Q4, Ford was cautious about its guidance for its South American operations since the currency fluctuations had already started to occur by that time. Ford had initially expected to breakeven in the region this year, but now that it expects a loss of $300 million in the first quarter alone it could easily miss its guidance.
China is now starting to become one of the biggest markets for the Dearborn-based automaker. Helped by the Focus and the Kuga, sales were up 46% through February. The momentum is likely to continue for the remainder of the year as well since the automaker will soon introduce the EcoSport and the Explorer. Ford’s Chinese sales now account for more than 10% of the total vehicles sold by the company.
Although Ford was profitable in Asia-Pacific in the fourth quarter of 2012, it still posted net losses for the full year. However, this is pretty common in the automotive industry where companies struggle to post profits during the initial years of investment. As long as the sales continue to rise, profitability will eventually catch up. We have a $13 price estimate for Ford, which is in line with the current market price.
Disclosure: No positions.