Do Ford’s Q4 2010 Results Mean the Turnaround Has Stalled?
By Chris Haak
Ford has been releasing some increasingly attractive earnings reports lately, dating back seven quarters, showing only black ink on its GAAP financials since the second quarter of 2009. And with the book closed on Ford’s fourth quarter results for 2010, the company announced its largest annual net income – a hefty $6.56 billion – in more than a decade. The good results are a product of Ford getting three key areas right: volume, product mix, and pricing. Also, Ford now has zero “net debt,” which means that the company now has more cash on its balance sheet than it does debt. Without the benefit of bankruptcy the purge the balance sheet like GM and Chrysler “enjoyed,” Ford has been at a competitive disadvantage by having to pay larger interest payments than its rivals did.
But amid the hype about Ford’s annual results for 2010, the company’s fourth quarter 2010 results were somewhat pedestrian by the standards that it’s set over the past two years. Fourth quarter GAAP earnings were “only” $190 million. Ford reported net income of $886 million in the fourth quarter of 2009, which is nearly an 80 percent decline. But, as is usually the case, the headline numbers don’t tell the whole story.
In its efforts to pay down its debt – you’ll recall that in 2006, Ford mortgaged itself nearly completely to finance its restructuring and development of new models, like the current Fiesta and coming-soon Focus – Ford had to make a $960 million payment in the fourth quarter in order to retire convertible debt. Excluding special charges such as that one-time item, Ford would have earned $1.2 billion on the quarter, which is mostly in line with its results throughout the other quarters in 2010. The overall 43 percent reduction in debt from 2009 to 2010 means that Ford has to spend $1 billion less on interest than it did a year ago. That’s real money.
So the headline is explainable, but what about the unexpected loss that Ford’s European operations reported? Ford Europe showed a $51 million loss, as demand sagged with the end of scrappage programs (which lasted much longer than the US Cash-for-Clunkers program did). But Ford lost market share in Europe, and saw its sales fall further than the overall soft market’s did. The company attributed its market share loss to its decision to “reduce participation selectively in low-margin business” in Europe. Ford is not alone with its struggles in Europe; just as the old country was Ford’s weakest link, so was GM Europe in GM’s final 2010 results.
The biggest negatives from Ford’s fourth quarter were higher structural costs and higher commodity costs. Commodity costs are going to rise for all automakers as the global economy shakes off its slump and improves; there will be more demand for commodities and therefore prices will continue to rise. Smart manufacturers have established hedging strategies for mitigating some of the commodity cost increases that are expected over the next few years; it’s unclear whether Ford has been able to offset some of those price increases.
Ford attributed the structural cost increase to product launches and new product development. If the company wants to maintain its sales growth momentum, it’s essential that it not only spend adequate money on marketing the new products, but that it continue to keep the pipeline of future products full and fresh. In my mind, there’s nothing wrong with investing in sales and marketing, and especially nothing wrong with investing money in future products. The expense of paying a supplier to produce tens of thousands of new rear axles for the recalled Windstar minivans also hit Ford’s structural cost numbers for the fourth quarter.
Ford shares were pummeled after the company announced its fourth quarter results, though. Why? Analysts had been assuming mistakenly that Ford’s fixed costs would remain relatively flat as the industry’s selling rate (known as SAAR) increased during 2011 past the 12 million mark. It’s clear now that Ford is not counting on gaining sales from only a rising tide, but also expects to continue to take share away from some of its competitors, and to do that costs money.
The Blue Oval company is not completely out of the woods yet. Though Ford has made considerable progress toward reaching a profitable, sustainable future, the company still has too much debt. With efforts still underway at Ford to reduce debt and improve products, Ford has a bright future. Its credit arm is profitable, as are its automotive operations. Now, if it could just get its European operations turned around – and keep up its recent product cadence – it very well may begin printing money, as analysts had hoped it would in the fourth quarter of 2010.
In short, the turnaround has not stalled. Ford is still in good shape and getting healthier each quarter.