Ford Posts Solid Profits at a Tough Moment
Jul 26th 2011 5:00PM
Updated Jul 27th 2011 7:29AM
Ford's (F) dramatic turnaround has captured the attention of investors and car buyers alike. Having raised a do-or-die war chest by mortgaging everything it could back in 2006, Ford rode out the economic crisis without government assistance -- and proceeded to return to solid profitability with a slew of impressive new products.
The cars and trucks in Ford's current line are among the best ever produced by an American automaker, with many comparing favorably to Toyotas (TM) and Hondas (HMC), long regarded as the world's quality leaders. But economic conditions around the world remain challenging, with consumers reluctant to spend and auto sales in the U.S. and Europe remaining well below pre-2008 levels.
So how is Ford coping with this difficult environment? Pretty well, though challenges remain.
Solid Profits at a Tough Moment
Ford reported a profit of $2.4 billion for the second quarter. That's down a bit from the second quarter of 2010, but it's higher than Wall Street expected.
Analysts expected profits to come under pressure from rising costs, and indeed they did. But Ford was able to make up some of the lost ground with price increases, thanks to the competitive strength of its products.
Ford increased its vehicle prices several times in the first half of 2011, using strong demand for hot products like the Fiesta and the Explorer to its advantage. These increases weren't just about squeezing buyers, though. A couple of different factors have driven Ford's costs up.
First, automakers -- not just Ford -- are paying more for raw materials. Rising industrial demand throughout the world has driven up the prices of many commodities, including things like the steel and rubber that all automakers need to buy in huge quantities. The global nature of commodity prices means that Ford won't be at a competitive disadvantage over the long term; everyone from Alfa Romeo to Volkswagen (OTC: VLKAY) will be paying more for their supplies.
But it does mean Ford will need to continue to raise prices to maintain its profit margins, and timing those increases is a tricky game. If the company raises prices more quickly than competitors, it'll find its products at a price disadvantage in the marketplace. But if it waits, its margins may be squeezed -- and sales may not rise by enough to make up the difference.
Product Matters -- for Lots of Reasons
This is where the strength of Ford's most popular products comes into play. In the old days, when they couldn't compete on quality, American automakers like Ford and General Motors (GM) were forced to discount heavily to keep sales going. But having some hit products makes a big difference: Buyers who are excited by the idea of a new Fiesta or Explorer or Mustang aren't going to be dissuaded by a price increase of a few hundred dollars.
Ford has quite a few strong products right now, thanks to actions it took back in 2006 which ensured that the company could continue to invest in product development during the economic crisis. But Ford needs to sustain those investments to make sure that the next generation of products is just as impressive, and those development costs are putting pressure on margins today as well.
These are substantial investments, in both time and money. A major new vehicle development program can take three years and cost a billion dollars, sometimes more. But investments like these are the cost of competing at the highest level in today's globalized auto business, and Ford CEO Alan Mulally is determined to keep the company at the top of the heap, in the U.S. and, increasingly, around the world.
That will be an expensive position to maintain. But done right, it'll continue to be a profitable one for Ford and its shareholders.
Motley Fool writer John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor.