Ford Expects Losses in South America - Analyst Blog

Ford Motor Co. F expects significant loss from South America in the second quarter of 2014. The negative expectation of the automaker is due to low sales volumes and change in the Venezuelan currency's exchange rate.

In the first quarter of 2014, Ford's revenues from South America declined 18% to $1.9 billion due to unfavorable foreign exchange, volumes and mix, which offset net pricing gains. Pre-tax loss increased to $510 million from $218 million in the first quarter of 2013 due to unfavorable currency exchange, higher costs and lower volume.

In order to increase the access to U.S. dollars, the Venezuelan government opened a new currency platform in March. However, last month Ford's operations in Venezuela were hampered for the want of foreign currency, required to import parts for assembly.

Ford's South American operation has been facing challenges since 2013 due to weakness in the industry, unfavorable exchange rates, high inflation, capital controls, changing regional trade policies and transition to global products in 2014. The automaker expects further trouble down the road due to low GDP growth and weakening industry together with increasing competition, excess capacity, high inflation, lower foreign reserves, change in trade policies and political and social uncertainty in some countries. As a result Ford expects to record operating loss from South America in 2014.

However, Ford expects to benefit from the expansion of its product lineup and enforcement of global ONE Ford offerings in South America. This will lead to higher sales, increased pricing and improved efficiencies.

Ford's North American business will benefit from the launch of new products which are high in demand. These new products ensure fuel efficiency and enhanced quality. In this region, the automaker focuses on delivering profitable growth with the launch of Ford F-150, Mustang, Transit, and Lincoln MKC in 2014. Moreover, the automaker expects industry demand to be high in North America and margins to improve with new product launches and an efficient cost structure.  

Ford expects 2014 pre-tax profit from North America to be lower than the 2013 level and operating margin to range from 8% to 9%.

Ford affirmed its pre-tax profit guidance, excluding special items, in a range of $7 billion to $8 billion for 2014. Automotive revenue is expected to be in line with 2013. However, automotive operating margin and automotive operating-related cash flow are expected to be lower than 2013.

In Europe, Ford is undertaking massive restructuring activities. As a result, the company will be incurring restructuring and launch costs. Overall, in 2014, Ford expects better pre-tax results than 2013 and anticipates profit in 2015.

In the new Middle East and Africa unit, Ford expects breakeven results in 2014. In Asia-Pacific, Ford expects pre-tax profit to be equal with the 2013 level.

Moreover, the automaker expects that Ford Credit's pre-tax profits in 2014 will be in line with the 2013 level. Net interest expense is expected to be about $700 million in 2014.

Ford currently carries a Zacks Rank #3 (Hold). Fox Factory Holding Corp FOXF, Gentherm Incorporated THRM and Tower International, Inc. TOWR are better-ranked automobile stocks. Fox Factory and Gentherm carry a Zacks Rank #1 (Strong Buy), while Tower International carries a Zacks Rank #2 (Buy).