Ford Motor Co. (F) showed an $1.04 billion improvement in profit to $1.91 billion or 48 cents per share (before special items) in the third quarter of the year, from $871 million or 26 cents per share (before special items) in the same quarter a year-ago. With this, the automaker outpaced the Zacks Consensus Estimate by 10 cents per share during the quarter.

The improvement in profit was fueled by the strength of Ford’s new products, consistently better performance at Ford Credit as well as a recovery in the North American automotive market.

Total revenues slipped 4.3% to $29 billion, including revenues generated from Volvo cars in 2009. This compared with the Zacks Consensus Estimate of $28.16 billion. However, excluding revenues from Volvo, sales improved $1.7 billion or 5.6% from the third quarter of 2009.

Ford Automotive

The Ford Automotive segment witnessed a 2.2% decline in revenues to $26.7 billion. Excluding sales of Volvo cars in 2009, revenues went up 8.8% to $29.7 billion.

The pre-tax operating profit improved $953 million to $1.29 billion during the quarter, driven by favorable volume and mix, net pricing and exchange rate fluctuations, offset partially by higher structural and commodity costs. The structural costs were higher in order to support volume growth and product development plans of the company.

In North America, revenues appreciated 21% to $16.2 billion. The region recorded a pre-tax operating profit of $1.6 billion compared with $314 million a year ago. The improvement was attributable to higher volume, and favorable mix and net pricing.

In South America, revenues escalated 19% to $2.5 billion. Pre-tax operating profit in the region fell marginally to $241 million from $247 million a year ago. The decrease was led by higher commodity costs, offset partially by favorable net pricing.

In Europe, revenues dipped 15% to $6.2 billion. The region had an operating loss of $196 million in sharp contrast to a profit of $131 million a year ago. The deterioration in earnings reflected lower industry volume, a fall in market share and higher structural costs and commodity costs.

In Asia-Pacific & Africa, revenues grew 20% to $1.8 billion. Pre-tax operating profit rose to $30 million from $22 million a year ago. The improvement in profit reflected higher industry volumes and reductions in material cost, offset partially by higher structural costs in order to support product and growth plans as well as mix shifts from developed markets to emerging markets.

Ford’s Other Automotive – consisting primarily of interest and financing-related costs – showed a pre-tax loss of $369 million in the quarter, which was explained by a net interest expense of $346 million.

Financial Services

The Financial Services segment reported a 15% increase in pre-tax operating profit to $761 million from $661 million in the previous year. Ford Credit showed a 13% rise in pre-tax operating profit to $766 million from $677 million a year ago.

The increase in profit was attributable to lower provision for credit losses and lower depreciation expense for leased vehicles, offset partially by lower volume and the non-recurrence of net gains related to un-hedged currency exposures recorded in the prior-year.

Financial Position

Ford had cash and marketable securities of $24.1 billion as of September 30, 2010, a marginal decline from $24.9 billion a year ago. Total Automotive debt stood at $26.4 billion as of the above date.

Ford paid down its revolving credit line by $2 billion during the quarter. Further, the automaker announced its plan to fully repay the remaining $3.6 billion it owes to the Voluntary Employee Beneficiary Association (VEBA) retiree health care trust by the end of this week. The move will lower annual interest expense of the company by about $330 million.

Including the payment to VEBA, Ford will reduce its total Automotive debt by $10.8 billion in the fourth quarter compared with the 2009 quarter. This will reduce the annual interest expense by about $800 million.

In the first nine months of 2010, the company’s Automotive operating-related cash flow improved $7.1 billion to $3.4 billion, driven by higher profit. Capital expenditures increased $200 million to $2.8 billion in the same period.

Outlook

In the upcoming quarter, Ford anticipates production level to increase 27,000 units from the prior year to $1.35 million units. For full year 2010, the automaker expects full year industry volume (including medium and heavy trucks) of 11.6 million units in the U.S. and 15 million units in the 19 European markets covered by it.

In 2010, Ford continues to expect its structural costs in the Automotive division to go up by $1 billion on a year-over-year basis in order to support key product launches and other growth plans. Capital spending is expected to be $4 billion as the company continues to focus on its product development plan.

For 2010, Ford expects profits at Ford Credit to be higher than 2009. On the contrary, the company anticipates profits at Ford Credit at a lower level in 2011 compared with 2010 due to the non-recurrence of lower lease depreciation expense and that of reductions in credit loss reserve of the same magnitude as in 2010.

Our Take

We appreciate Ford’s product plans and debt reduction strategy. The benefits from these strategies have already been reflected in the company’s results.

However, we are concerned about the company’s higher structural and commodity costs. As a result, the company retained a Zacks #3 Rank on its stock, which translated to a short-term (1–3 months) rating of Hold.

 
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