By Darnell Brown
In 2011, the profits for the big three American automakers Ford (F) General Motors (GM) and Chrysler Group LLC (FIATY.PK) came roaring back. "After falling over 60% from the second quarter of 2007 to the first quarter of 2009, the output of motor vehicle assemblies has more than doubled. In the U.S., demand for new motor vehicles is also increasing, as unit motor vehicle sales in the first three months of 2012 rose to 14.5 million units at an annual rate, their highest level since the first quarter of 2008."
Ford Motor has benefited mightily from the pick up in auto sales. Ford is the second-largest American automaker and the fifth-largest automaker in the world based on annual vehicle sales. Ford has a market cap of $40.5 billion, and in 2011 it had revenue of $136.2 billion. On April 27, Ford released its earnings for the first quarter of 2012. The company had first-quarter earnings per share of $0.35, which was a 74% decrease from earnings per share of $0.61 in the first quarter of 2011. First-quarter revenue was $32.4 billion, which was a 2% decrease from revenue of $33.1 billion in the first quarter of 2011. First-quarter net income was $1.4 billion, which was a 78% decrease from net income of $2.5 billion, in the first quarter of 2011. Consensus analyst estimates were for earnings per share of $0.35 with revenue of $32.3 billion.
The decrease in Ford's earnings were primarily driven by higher taxes and slumping European sales. The company's effective tax rate increased to 32.5%, which was up from 8% in the prior year. In Europe the company "had a pre-tax operating loss of $149 million on significantly weaker sales compared to a $293 million pre-tax profit a year ago." Other one-time items included buyouts for 1,700 workers that cost the auto maker $255 million. Ford's CEO Alan Mulally did not sound overly confident when he discussed the company's earnings for the rest of 2012. Mr. Mulally predicted that "the total company full-year pretax operating profit is expected to be about the same as in 2011."
Despite the fact that Ford's year-over-year first-quarter net income was down by 78%, there were a number of positives to be derived from the earnings report. For instance "Ford saw its North American pre-tax operating profit rise to $2.1 billion, up from $1.8 billion a year ago - and the best performance since it began breaking out earnings for the unit in 2000. The operating margin for North America rose from 10.3% a year ago to 11.5%." The first quarter also marked the eleventh consecutive quarter in which Ford had a pre-tax operating profit.
During the first quarter, the Fitch Credit rating agency returned Ford's credit rating to investment grade. Perhaps Ford's credit rating was increased, because it decreased its automotive debt to $13.7 billion at the end of the first quarter, from $16.6 billion at the end of the first quarter of 2011. The upgrade could significantly reduce Ford's borrowing cost and lead to improved credit ratings from the Moody's and Standard & Poor's credit agencies.
Ford reduced the risk to its pension plan by announcing that it "will offer to about 90,000 eligible U.S. salaried retirees and U.S. salaried former employees the option to receive a voluntary lump-sum pension payment." Bob Shanks, Ford executive vice president and chief financial officer said. "Providing the option of a lump-sum payment to current salaried U.S. retirees and former employees will reduce our pension obligations and balance sheet volatility."
Since 2008 Ford has successfully completed efforts to streamline its operations and increase efficiency. A big part of the effort to become more efficient has been in the form of shedding its losing auto making divisions. "Ford's former UK subsidiaries Jaguar and Land Rover were sold to Tata Motors (TTM) of India in March 2008. In 2010 Ford sold Volvo (VOLVY.PK) to Geely Automobile. Ford discontinued the Mercury brand after the 2011 model year. The company is controlled by the Ford family, which owns a controlling stake in Ford Motor."
On January 27, Ford paid a $0.05 dividend. The dividend payment was the first dividend payment that the company has made since July of 2006.
On May 9, Ford executives announced that because of increased demand the company "plans to add a week of production at 13 plants, including its two assembly plants in Louisville, as part of its effort to increase its annual production capacity by 400,000 vehicles."
Ford's year-over-year revenue and net income were down in the first quarter, and part of the reason was because sales were down in both Europe and in China. Ford also "experienced sales downturns in other parts of Asia, Africa and Latin America during the first quarter of 2012."
Ford's retiree buyout packages could also reduce earnings. Ford does not know how many of its former employees will agree to accept the packages or the final cost of the buyouts.
The momentum of Ford's stock price continues to spiral downward. Ford's stock price is down by 30% over the last 52 weeks, and down by 8% since April 27, when the company reported first-quarter earnings.
While Ford's first-quarter earnings were disappointing, I do not believe that investors should be discouraged from considering this stock. The company has had a pre-tax operating profit for 11 straight months. The company has also improved its balance sheet and increased shareholder equity, and as a result is once again able to pay a dividend. Finally with a price-to-earnings ratio of 2.2 and a price-to-book ratio of 2.7 the stock is cheap. It is probably not a good idea to buy the stock at this time, but I would certainly reconsider if the stock price stabilizes or begins to move higher.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.