Ford makes $1.2 billion, but trouble looms
Analysts cautious as company's finance arm buoys struggling auto business in 2nd quarter
By Eric Mayne / The Detroit News
DEARBORN — Ford Motor Co.’s second-quarter profits nearly tripled to $1.2 billion on strong financing operations, but the company is struggling to make money selling cars and trucks.
Ford raised profit projections and now expects to make $5.3 billion pretax this year. But the good news for Chairman and CEO Bill Ford Jr.’s ongoing turnaround effort was tinged with signs of trouble.
Ford’s worldwide automotive operations lost money in the second quarter and its European-based Premier Automotive Group — including Jaguar, Volvo, Land Rover and Aston Martin — posted an alarming $362 million loss despite sales that rose 8 percent to $6.9 billion. Ford warned Tuesday that its luxury auto division likely will finish the year in the red and that another restructuring at Jaguar is needed.
Investors pushed Ford shares down 38 cents — or 2.5 percent — to $14.60 a share Tuesday in unusually heavy trading volume.
“While the quarterly profit is good, you’d like to make more of it from selling cars than from financing cars,” said Dan Poole, vice president of equity research at Cleveland-based National City Corp., which manages $23 billion in assets, including Ford shares.
In North America, automotive earnings rose $10 million to $455 million in the second quarter. But sales fell slightly to $20.5 billion from $20.7 billion.
Higher vehicle prices and demand for more expensive models were offset by declining overall sales.
Ford is cutting fleet sales to rental car companies and other customers to focus on more profitable retail sales. But increasing incentives, high vehicle inventories and costly plant changeovers could slow momentum in the U.S. market in coming months.
The second quarter results underscore the challenges Ford faces as it attempts to rebound from $6.4 billion in losses in 2001 and 2002 in a competitive worldwide market. Ford launched a turnaround in January 2002 and promised investors it would earn $7 billion in pretax profits by mid-decade.
Ford is counting on the introduction of several new vehicles by year’s end, such as the Ford Five Hundred large sedan and Hybrid Escape sport utility vehicle, to lift sales and market share.
The automaker increased its full-year earnings guidance for the third time Tuesday, hiking its projection 15 cents per share. Based on the new earnings estimate of $1.80 to $1.90 per share, Ford stands to earn $5.3 billion in pretax earnings this year — with the bulk coming from credit and financing.
In the April-June period, Ford Motor Credit reported record net income of $897 million, up $496 million from a year ago.
Ford’s second-quarter earnings also were buoyed by a turnaround at Ford of Europe, which sells blue oval-badged cars in Germany, England and elsewhere. Ford of Europe reported a pretax profit of $211 million, excluding special items, versus a loss of $525 million in the year-ago quarter.
The good news at Ford of Europe, though, was overshadowed by the losses of the Premier Automotive Group, the collection of European luxury brands. Ford does not break out the financial performances of its brands, but Chief Financial Officer Don Leclair said the luxury division suffered because of unfavorable currency exchange rates and costly retooling efforts at plants that build Land Rover and Volvo products. The Premier Automotive Group is launching two redesigned vehicles — the Land Rover LR3 and Volvo S40 and V50 compact cars.
But Jaguar is still struggling and hobbled with high operating costs that Ford plans to address.
“We’re not talking about major, significant, Earth-shattering changes here,” Leclair said. “We’re just talking about re-evaluating the business structure. It’s a high priority.”
Leclair said the Premier Automotive Group, together with Lincoln U.S. luxury division, will still contribute one third of Ford’s total earnings by mid-decade, said Leclair, even though “the market for luxury vehicles in the United States in particular has gotten tougher.”
Still, the loss recorded by the luxury division prompted some analysts to question Ford’s strategy of assembling Europe-based luxury brands.
“The Premier Group might have been a good idea at the start,” said George Magliano, Global Insight’s director of auto industry research for the Americas. “It hasn’t done very well.”
The Premier Automotive Group posted losses for two years until the second quarter of 2003. It earned $164 million in 2003, an upswing of $904 million from 2002. But its quarterly performance remains inconsistent.
Ford’s second-quarter earnings did little to offset disappointment among analysts over the Premier Automotive Group’s performance, which was “much lower than expected,” said Deutsche Bank analyst Rod Lache.
“On balance, we don’t see anything significantly positive or negative in the quarter, and don’t expect the stock to react meaningfully,” Lache said in research notes.
In the second quarter, Ford’s automotive operations lost $57 million, including charges of $120 million to increase a stake in fuel cell supplier Ballard Power Systems and $20 million to complete restructuring moves in Europe.
While investors and analysts remain lukewarm, Ford executives remain upbeat.
“We’re improving our business,” Leclair said. “The financial services side is improving faster than the auto side. But we are going to make $1 billion in the auto business for this year.”