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Ford's Latest Models Drive a Big Profit

Thursday - 4/25/2013, 2:15am  ET


Ford's new Fusion has rapidly climbed the U.S. sales charts. Photo credit: Ford Motor Company

Ford reported a $1.6 billion first-quarter profit on Wednesday, better than Wall Street expected.

Much of that was driven by the company's success in its home market of North America. Ford's turnaround here at home was a painful one, but the result has been great: busy factories, popular new models – and record profits.

Ford earned $2.4 billion before taxes in North America, a record. Right now, Ford's profits at home are carrying the company, because its overseas operations face some stiff challenges.

But those challenges come with opportunities – opportunities for Ford to add even more profits to its bottom line in a few years.

How Ford makes money around the world
Ford is divided into five principal business units. Four of them cover the major parts of the world where the company builds and sells vehicles, and the fifth is Ford Credit, its in-house bank.

The best way to understand how Ford did in the first quarter is to look at each of those business units in turn. Here's how they did during the first quarter. The profit and loss numbers listed for each unit don't include the effects of taxes.

North America
Ford CEO Alan Mulally often says that North America is the "engine" of Ford's business. Ford earned $2.4 billion here in the first quarter, its best-ever quarter since it started tracking North America separately in 2000.

Strong sales of its F-Series pickups and of its new cars, especially the new Fusion, helped here. Those sales have kept Ford's factories very busy, with many operating on two or even three shifts. That has led to very strong profit margins here – 11% in the first quarter, which is huge for an automaker.

South America
Ford's operation in South America is a relatively small but important one. It lost $218 million in the first quarter, but that was better than expected. Ford had warned that big, unfavorable shifts in currency exchange rates in Venezuela and Argentina would lead to a sizable loss.

Ford officials said that they expected to break even in South America for the full year, but they remain concerned.

Europe
Europe has been a big trouble spot for Ford, just as it has for rival General Motors . The problem here is a familiar one to Americans: Sales are way down due to a recession, and the automakers have more factories than they need to meet demand. That means costs are high, and profits are nonexistent.

Ford lost $462 million in Europe in the first quarter, which was not at all a surprise. The company has already said that it could lose as much as $2 billion in Europe this year.

But Ford's turnaround plan for Europe, announced last fall, is already unfolding: Three factories are set to close, and several new models have already been introduced, as Ford works to turn around Europe in the same ways it turned around North America a few years ago.

Ford expects Europe to break even by mid-decade, and its plans appear to be on track. That's one of the factors that makes Ford's stock an intriguing buy right now: If Ford goes from a $2 billion loss to breaking even, that's a $2 billion gain in profits in just a few years. Ford made $8 billion last year, so that would be a sizable increase – one that would be expected to drive a nice gain for the stock price.

Asia Pacific Africa
Ford made just $6 million in its "rest of the world" region, but the story here is very different from those in South America and Europe. Ford is investing a huge sum – nearly $5 billion – to build a series of new factories and facilities in Asia. Right now, the company has five factories under construction in China and two in India.

Those investments are offsetting the very good sales gains that Ford is already making in places like China. Ford got a late start in China relative to competitors like GM and Volkswagen (NASDAQOTH: VLKAY), but it's making up for lost time.

Its market share in China was up to 3.6% in the first quarter, a full point ahead of where it was a year ago. Already, the Ford Focus is a Chinese best-seller – and many more new Ford models are set to be launched over the next few years.

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