Ford (NYSE: F ) reported second-quarter earnings of $1.2 billion on Wednesday, a profit that was driven by good – or at least, improving – results in Ford's operations all around the world.
Ford earned $2.6 billion, or $0.45 a share before taxes, handily beating Wall Street estimates that called for a result of $0.37 a share. Ford management also raised its full-year outlook for the company's profits.
The news drove Ford stock sharply higher. It closed on Wednesday at $17.37, up 2.54%, as investors digested the (very good) story behind Ford's regional earnings numbers.
A closer look with Ford's CFO
To get a deeper sense of that story, I spoke with Ford's chief financial officer, Bob Shanks. We reviewed the highlights for each of Ford's regional divisions in turn.
Shanks noted that, in the first quarter, Ford's three overseas divisions together posted a pre-tax loss of about $674 million. Ford's strong earnings in North America were more than enough to offset that loss, but it was still a big hit to the company's bottom line.
Things were different this time around. The three divisions together posted a loss of just $25 million, as big improvements in Ford's South America and Asia Pacific Africa regions nearly offset its loss in Europe – and that European loss was significantly lower.
Gains in all of Ford's overseas regions
Ford has gained market share and is getting better prices for its products in South America, Shanks said, thanks to its improved product line. But tough economic conditions in Brazil and unfavorable exchange-rate moves in other countries have kept profits tight. Still, Ford made $146 million in South America before taxes in the quarter, a solid result that represents a big improvement over recent totals.
The Ford EcoSport, an SUV based on the Fiesta's platform, is one of several new products doing well in South America, despite challenging conditions. Photo credit: Ford Motor Co.
It's a different story in Asia Pacific Africa, Ford's "catch-all" region, where massive expansion efforts in China and India have offset profit growth and kept the region near break-even in the last few quarters. Not so this time: Ford reported a pre-tax profit of $177 million for the region, its best ever.
I asked Shanks if that improvement in profit meant that Ford's investment cycle – the money it is paying out to build several new factories in Asia – had peaked. He said it hadn't, that Ford expects to be spending heavily on expansion for a few more quarters, and that the improved profits were driven largely by increased sales. Ford's sales in China are up over 40% so far this year.
The Ford Focus is one of China's best-selling cars. Photo credit: Ford Motor Co.
That's something for Ford investors to keep in mind: Ford made record profits in Asia despite big spending on a bunch of new factories. Once that spending is done and those factories are up and running, profits in this region – and for Ford as a whole – are likely to take a big jump up.
Europe is another place where Ford is likely to see significant gains over the next several quarters. New-vehicle sales in Europe are at 20-year lows, thanks to steep recessions, and most automakers in the region have booked big losses. Ford is no exception: The company lost $1.8 billion in Europe last year.
The Fiesta has been a European best-seller for years, but now it's being joined by more of Ford's global lineup. Photo credit: Ford Motor Co.
But there's a turnaround plan under way, and already we're seeing some signs that the plan is having a positive effect. Ford is in the process of closing three factories, a move that will lead to big restructuring charges in the near term but that should help boost earnings by 2015 or so.
Meanwhile, other moves are already helping. Ford has introduced several new products in Europe, and that has led to market share gains over the last couple of months. Shanks explained that the company has also made a big effort to go after only the most profitable kinds of sales, turning away from sales to rental-car fleets and emphasizing retail and high-margin commercial sales instead.
It's working: Ford's pre-tax losses in Europe in the second quarter narrowed to $348 million, down from $462 million last quarter – despite the significant restructuring charges that are already having an effect. That led Ford to raise its guidance: The company had expected to lose $2 billion in Europe this year, but now says that losses should be comparable to last year's, around $1.8 billion.
Ford remains very strong in its home market
Ford's turnaround in North America has put it in a very strong position here, and now that turnaround is being used as a template for Ford's overseas operations. But it's worth noting that Ford's earnings at home continue to be the key driver of the company's profits: Ford earned $2.3 billion in North America before taxes, up $319 million from the second quarter of last year.
Ford's stalwart F-150 and its Super Duty siblings are the company's biggest profit generators in North America. Photo credit: Ford Motor Co.
Strong sales of Ford's much-improved lineup of cars, including the Focus, the C-Max hybrid, and the hot new Fusion have all been big contributors. But the biggest contributor, as always, has been Ford's F-Series pickup line, which has benefited from an industrywide boom in full-sized pickup sales. Ford's operating margin in North America was 10.4%, an outstanding number.
The upshot: a good quarter, and signs of better things to come
As Shanks emphasized to me – and he's right – the story here is that Ford's success in North America is continuing even as all of its overseas regions are making progress.
For Ford shareholders, it's a great story: As the European turnaround continues and the Asian expansion starts to bear fruit, Ford stands to see significant increases in its overall profits over the next few years.
As those increases become more visible, Ford's stock price, already up over 28% so far in 2013, seems likely to keep moving upward.
Ford is laying the groundwork for huge sales growth in China over the next several years, growth that could drive major gains for Ford stock. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", says that Ford is one of two global auto giants poised to reap outstanding gains as China's auto boom continues to unfold. You can read this report right now for free – just click here for instant access.
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