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Ford warning on pricing, profit margins hits stock

December 18, 2013

DETROIT (AP) — Ford Motor Co. warned of tough price competition and harder-to-reach profit targets Wednesday, a sign that the company and the auto industry face a tougher road after four years of robust recovery from the Great Recession.

Ford said its pretax profit next year would drop as much as $1.5 billion below a near-record level of $8.5 billion in 2013. The company will have to slow price increases in North America — or even boost discounts on some models — and its costs will rise because of an ambitious launch of almost two dozen vehicles worldwide.

U.S. auto sales have risen by more than 1 million vehicles annually since 2009, but many analysts have said that pace isn’t sustainable.

Joe Hinrichs, who runs Ford’s North and South American operations, told The Associated Press Monday that he expects sales growth to slow in 2014.

At a conference for analysts on Wednesday, Chief Financial Officer Bob Shanks warned that Ford’s profit margins in North America will shrink because of price competition in the U.S., the cost of launching nearly two dozen new vehicles worldwide and economic conditions in Europe and South America.

That spooked investors — one analyst called it panic selling — and drove the company’s shares down more than 7 percent on about five times the normal volume.

Investors worried about Ford’s profits slipping after the company predicted $7 billion to $8 billion before taxes next year. They also fretted about price competition in the U.S., where Ford makes most of its money, and about company guidance that it wouldn’t hit profit margin targets for the middle of the decade.

Shares of General Motors also dropped 3.5 percent, a sign that investors think the sharp sales gains and big profit increases for Detroit have hit a roadblock. Honda and Toyota shares, however, were up.

Ford said its North American sales likely will be lower next year as it rolls out 16 new models. The company said it will have to discount older models as it transitions to new ones. It also expects continued tough price competition, especially in small and midsize cars, due in part to Japanese automakers taking advantage of a weaker yen versus the dollar.

“Costs associated with this product growth will increase next year as well,” Ford said in a statement.

Ford was near collapse in 2006 when it hired CEO Alan Mulally away from aviation giant Boeing. Almost immediately, the company borrowed $23.6 billion to make it through the recession. It shed unprofitable brands, closed plants and invested in new cars and trucks that are sold worldwide. Now it’s making billions.

But uncertainty about Mulally’s future has put a damper on the stock. He’s reportedly in the running to become Microsoft’s CEO, but a decision won’t come until early next year, according to the technology company’s board.

The combination of events sent Ford’s stock down $1.16, or 7 percent, to $15.54 on Wednesday afternoon. Previously, the stock had risen almost 30 percent this year. But Ford shares sank as low as $15.17 in the morning, the lowest price since $15.10 on June 26. They have traded in a range from $11.47 to $18.02 in the past year.

Also giving investors pause was Shanks’ warning that Ford could fall short of earlier guidance of 10 percent operating profit margin in North America this year because of a large recall of Ford Escape small SUVs with 1.6-liter engines. It now expects the margin — the percentage of revenue it gets to keep — to be 9.5 to 10 percent. Costs from the recall will be $250 million to $300 million.

Before the recession, competitors typically would get far higher prices for their cars than Ford, but Ford has eliminated that gap now, Shanks told the analysts. That means future increases likely have to come from introducing new models or getting buyers to add options, Shanks said.

He also expects South American and Asia-Pacific profits to be flat in 2014.

In South America, a major devaluation of currency in Venezuela will offset better profits in Brazil and Argentina.

Costs of building new factories in China and India and charges for ending manufacturing in Australia will hold profits flat in Asia-Pacific, the company said, although Shanks emphasized that 2013 was a record year.

In Europe, Ford is still on track to be profitable in 2015, Shanks said. But it expects about $400 million in restructuring costs this year and next to be a drag on profits.

Ford also said its prediction of an 8- to 9-percent operating margin by mid-decade is at risk because the European downturn and conditions in South America were not expected when the outlook was released in 2011.

For this year, Shanks expects 10 percent overall revenue growth, improved market share in all regions except Europe and stronger cash flow than a year ago. In North America, where the company makes most of its money, the pretax profit is expected to be the highest in more than a decade.

Ford also said it nearly cut in half the underfunded balance of its global pension plans, compared with the end of 2012.

Ford plans to launch 23 global vehicles next year, including 16 in North America. It’s the biggest single-year number in more than a century.

Buckingham Research analyst Joseph Amaturo, in a note to investors after the analyst conference, said the 2014 guidance highlights his concerns about limited earnings leverage for Ford in the future. “We believe Ford’s 2014 guidance fell short of consensus 2014 expectations due to deterioration in North American pricing and lower F-Series production,” he said in the note.

Amaturo gives Ford an “Underperform” rating and has a one-year price target for the stock of $12.

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