Can Ford Keep Up?
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The financial crises that have plagued markets for the last five years have been particularly brutal to automobile stocks. As producers of consumer discretionary products, highly dependent on disposable income among consumers, the industry is traditionally a high-risk one as it is. Ford (NYSE: F) is one of the world’s largest producers of automobiles and one of the globe’s most recognized brands. The markets have not been kind to Ford lately, which is partly a reflection of poor earnings. The question remains whether Ford can keep up with the competition.
Ford maintains an operating margin of 8.6%, but is bogged down by a massive LT Debt to Equity ratio of 395. Ford trades at 2.03 to book with a big 2.31 beta. For comparison, General Motors (NYSE: GM) has a P/E of 5.7x with a LT Debt to Equity ratio of 30.64 and a 5.4% operating margin. Toyota Motors (NYSE: TM) somehow trades at a huge 33.9x earnings with a LT DTE ratio of 57.3 and an operating margin of 1.8%.
While Ford has been doing better since blowing out big-time in 2006 and 2008, their most recent earnings reports have not had investors clapping their hands in glee. The company reported an EPS of $1.51 over 2011 which missed by a whopping 18%. Earnings for 2010 missed by about 8%. The first half of 2012 came in a little better, with earnings beats in both quarters. Q1 came in at $0.39 which beat by about 11%, Q2 EPS was $0.30, which beat the $0.28 consensus. It was however the Q2 earnings report that had me a bit worried.
On the surface, the report doesn’t look too bad at all, with very strong performance for Ford Motors in North America and continued good performance over at Ford Credit. Revenue as well as the operating margin were up for the year although market share decreased somewhat. These good results offset the poor performance in other markets, which is what set off the alarms for me. The firm has registered a loss of $404 million pre-tax in Europe so far this year and has seen the operating margin decrease to negative 5.8%. For the whole of 2012 the company expects to post a loss of over a billion dollars in Europe, citing weak business conditions due to the sovereign debt crisis and the related austerity measures. Competitor Volkswagen is faring considerably better in Europe, continuing to outperform the market in each of its operating regions despite recording a decrease in sales volume.
In Asia Pacific and Africa, the losses were less dramatic. The pre-tax loss totaled $66 million and the operating margin was a negative 2.9%. The company expects further easing to stabilize the economy in these areas and has a more positive outlook for these markets. Competitor Toyota saw a sales increase of 40,000 units in Asia and saw its operating loss decrease to 1.9 million Yen. In North-America, despite positive results, Ford may continue to lose market share due to a lack of production capacity which leaves them unable to keep up with demand. While results are stable in Latin-America, increasing competition from other American, Japanese and European carmakers may affect revenue in the second half of the year.
It’s been a rough few years for Ford. While the company has successfully turned around its North American operations, the most recent earnings report indicates weakness in several other regions. While all carmakers have been in heavy weather in terms of sales, it appears as if some of Ford’s competitors are better positioned to withstand the financial crisis. It remains to be seen whether Ford can keep up with this competition.
DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.