Despite Strong Earnings, Europe Weighs on Ford

Ford posted a solid fourth-quarter result that soundly beat estimates on the strength of continued good results in North America. Ford's pre-tax profit for the quarter was $1.7 billion, a big improvement on year-ago numbers.

But Wall Street was unimpressed. Shares were down over 5% at midday, as traders and investors reacted to Ford's 2013 guidance - specifically, to its guidance about Europe.

More doom and gloom in Europe
Ford CFO Bob Shanks said to analysts and media: "It's just a very tough economic environment in Europe. We have a lot of difficult times in front of us."


Ford's outlook for the European market in 2013 was unexpectedly pessimistic, following a worse-than-expected loss for the quarter. Ford had been expected to lose about $1.5 billion in Europe in 2012, and had said back in October that it would likely lose a similar amount in 2013.

But Ford's full-year loss came in at $1.75 billion, and the company said that it expected to lose $2 billion in the region in 2013. For the quarter, Ford lost $732 million, as continued sales declines cut deeply into revenues.

Nearly all automakers doing business in the region are struggling in Europe, as deep recessions in many European countries have driven auto sales to lows not seen since the mid-1990s. To its credit, Ford has done better than some, holding on to most of its market position despite an unwillingness to engage in the steep discounting practiced by some competitors.

That unwillingness will serve Ford well in the long run, but steep losses will likely be a fact of life for awhile - at least until mid-decade, when Ford's plan to restructure should begin to bear fruit.

Using "One Ford" to transform a problem area
Last fall, Ford CEO Alan Mulally announced a comprehensive plan to overhaul Ford's European operation. It's a plan that draws heavily from the "One Ford" plan that transformed Ford's North American business.

Among other provisions, "One Ford" calls for a single, streamlined global lineup of products. No longer does Ford produce models intended solely for one region; as it had for years (at great expense). Now, it's possible to make and sell just about any of its cars and trucks anywhere.

The benefits of that approach have been enormous - better-quality vehicles that cost less to produce, because of larger economies of scale. Now, that approach is being applied to Europe, where Ford has traditionally sold only a small range of vehicles.

Over the next couple of years, additional models from Ford's global portfolio will be introduced to European consumers, including several SUVs and the next-generation Mustang. Factories will be closed - three closings have been announced - so that Ford can make best use of its manufacturing capacity, as it does here in the U.S. Also, Ford will overhaul its marketing approach in the region, to bring it in line with approaches that have been successful elsewhere in the world.

The plan has been well-received by Wall Street, in part because it draws on Ford's success in turning around its North American division, and in part because it stands in sharp contrast to the more muddled approach taken by key competitors, including General Motors . While GM has struggled to pull together a cohesive, credible, turnaround strategy for its own money-losing European operation, Ford has simply proceeded with a proven approach - a difference that has not been lost on investors.

The right approach, but patience is required
That said, Ford's approach will take time to bear fruit. Mulally and Shanks have made it clear that Ford does not expect to break even until "mid-decade," which means at least another two years of sizable losses.

If market conditions worsen, even more cuts may be needed. Ford has repeatedly signaled - and Shanks reiterated on Tuesday - that it will not hesitate to cut further if necessary to return Europe to sustainable profitability.

That should reassure investors in time, despite Tuesday's sobering guidance for the near term.

Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. The stock has recently taken off, and it appears investors have started to notice what Ford is doing right. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

The article Despite Strong Earnings, Europe Weighs on Ford originally appeared on Fool.com.

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