Ford (NYSE:F) posted its best earnings since 1998 on Tuesday, but boosting first-quarter profit by a whopping 48%. But three key developments behind that headline number are equally important for Ford’s operations for the rest of 2011:
1. Market-share drop. Amid optimism about the rebound in consumer confidence and a rise in auto sales, Ford executives last December predicted that the company’s share of the all-important U.S. market would at least hold steady.
But Ford’s first-quarter retail sales share came in at a disappointing 13.6% — slipping by half a percentage point. In a conference call with analysts and reporters, Ford officials chalked up the miss to big incentives offered by competitors.
For automakers, U.S. market share is more than a matter of bragging rights, because missing market share targets — let alone losing market share — creates pressure to discount vehicles. That eats into profit. While Ford held the line and cut incentives in January and February, it raised incentives in March by more than $3,100 a vehicle. That’s why Ford beat out General Motors (NYSE:GM) last month to grab the top spot in U.S. sales.
2. Higher structural and commodity costs. In an earnings report filled with optimism, Ford’s higher-than-expected commodity and automotive structural costs – a total of $700 million more than the automaker had estimated — injects a small reality check.
Commodity costs rose by $300 million in the first quarter and Ford estimates they will be about $2 billion higher for the full year. The impact of inflation on raw material costs, as well as more expensive technology and features for Ford’s new vehicles are largely responsible for the increase. Automotive structural costs were $400 million higher and are expected to add yet another $2 billion to Ford’s costs this year. Structural costs include higher production volumes, investments in future growth and gearing up for new launches.
Although some of this additional expense — particularly the investment in future growth — will yield big returns for Ford’s operations, it is likely to weigh on earnings in the near term. More aggressive pricing may mitigate the impact this year, but it will require a delicate balancing act if Ford wants to boost retail market share.
3. Supply-chain challenges in the wake of the Japan disaster. The crisis in Japan is the entire auto industry’s problem. Although the loss of production at Toyota (NYSE:TM), Nissan and Honda (NYSE:HMC) creates a potential opportunity for Detroit’s Big Three, no automaker is immune to supply chain problems. While the disaster has had only minimal impact on first quarter production volume, Ford’s Asia-Pacific and Africa operations soon will be affected by component shortages.
Like all automakers trying to mitigate risk from Japan, Ford doesn’t know what it doesn’t know. Multiple suppliers have experienced facility damage and infrastructure problems and there’s a ton of uncertainty about when suppliers can get back to work and ramp up production. While Ford is seeking out alternatives, most of its vehicles are so tightly customized, it’s difficult to just plug in a similar part. These challenges are likely to impact production later in the year.
Bottom Line: Ford is strong enough to weather these challenges and move forward. Sales of its new fuel-efficient vehicles are likely to grow as a result of shortages in Japan-made vehicles such as the Prius hybrid. Still, the company may face significant headwinds to higher sales and earnings growth for the remainder of 2011.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
