Ford Motor Company presented at the Citi Global Industrials Conference last week. Representing Ford Motor Company were Bob Shanks, CFO, and members of the IR team. Analysts mostly walked away with continued comfort around Ford Motor Company’s long-term story. Thoughts on Q3 Update — Ford provided a Q3 update. The company noted that Q3 EPS is tracking about in-line with Q2 ($0.30), which is consistent with $0.29 consensus.
The quarter is, however, expected to benefit from a somewhat lower tax rate, which suggests that Q3 pre-tax auto results may come in somewhat lighter vs. Q2 ($1.4bln), or perhaps around $1.3 billion (vs. our $1.4bln Q3 estimate). Like last quarter, strength is expected at North America and Ford Motor Company (NYSE:F) Credit with remaining regions staying weak, mainly Europe. While Ford’s updated Q3 view may imply a slight pre-tax auto profit shortfall vs. our model, many analysts were actually quite relieved the revision wasn’t worse given very weak conditions in Europe thus far in the quarter. Analysts believe Ford is making progress on the cost component of its European turnaround plan, and any announcements on that front may inject a sense of eventual bottoming for European losses.
Other Takeaways —
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In North America, Ford Motor Company (NYSE:F) provided a slide showing that its product refresh rate (% of sales from significantly refreshed or all-new product less than 1-year old) should accelerate in 2013 vs. 2012 and remain robust in 2014 (i.e. above 2012 levels). This was comforting as some investors have been worried that Ford’s product cycle may slow in 2013. Regarding margins, Ford Motor Company (NYSE:F) appeared confident in North America mid-decade margin goal of 8-10%, which is being viewed as a mid-cycle objective (suggesting potential upside at peak).
At the conference Shanks noted in regards to margins:
We’ve earned margins in the first — operating margins in the first half of the year that’s over 10%. That is very, very strong. And as you and I were talking about last night, obviously, we benchmark extensively our competitors. And the ones that are performing the strongest now in terms of margin are Volkswagen AG (ETR:VOW) (FRA:VOW) and Hyundai-Kia. I think Volkswagen AG (ETR:VOW) (FRA:VOW) through the first half is in the 8% to 9% range, if I remember correctly. Hyundai-Kia, maybe 10% to 11%, actually stronger than we were in North America. So — and they are hitting on all cylinders.
It just feels like when we go back and look at history that for a lot of different reasons, if you start on a consistent basis in a quarter, it can peak and valley, just because of the flow and the timing of revenue across. But it feels like an 8% to 10%, 11% margin on a consistent basis seems to be about what the industry can generate at the top end.
Actually, I would argue on a cycle average. Because what we are trying to do when we talk about the 8% to 10% for North America and 8% to 9% for the Company is to be able, over an economic cycle, to earn that, recognizing there will be years where it could be higher and there could be — well, there will be years where it is lower when we are in a downturn. But on sort of a trend basis, on an average cycle, I think that is probably a reasonable objective to aspire to.
And we are getting the 10% margin in North America at what historically would have been considered recessionary conditions. But the business is in good shape. The breakeven is at about 10 million units, which is good. So the cost structure is good relative to the revenue we are generating and the margins. And right now, at least, the environment in North America is favorable in terms of pricing industrywide. Everyone is being quite disciplined and focused on margin.
So I’m not sure how long that lasts, but I think there are a lot of factors that are contributing to it. But I think it starts with us having the right structure and a strong product lineup. And the brand is also improving, which, again, is something that is part of our aspirations in Europe as we think about the recovery there.
In Europe, Ford expectedly expressed concern over macro and industry conditions, but we were encouraged to hear that the company is not placing reliance within its turnaround plan on other automakers executing major rationalization (if they do, it’s an added potential benefit). Like in the North America turnaround, Europe will also require a heavy product component, which the company recently unveiled and also covered at our conference. Though Ford has less of an ATP disadvantage in Europe vs. the disadvantage it had in North America years ago, there are opportunities to close various competitive pricing gaps and also enhance mix.
General Motors Company (NYSE:GM) is entering the heaviest (as a % of units) and richest (on incremental margins) portion of its product cycle, with its pickup trucks and SUV’s getting fully redesigned in the next two years. General Motors Company (NYSE:GM) hasn’t seen this level of refresh activity in over five years.
As General Motors Company (NYSE:GM)’s refresh activity accelerates, it should offer a meaningful tailwind to earnings momentum through higher share, lower incentives and higher transaction prices, despite a rough IPO.
(Disclosure: No position in any securities mentioned)