Here’s Why Analysts Aren’t Optimistic About Ford Earnings

Ford Motor Co. (NYSE:F) is expected to report sharply lower first-quarter earnings after sales slumped in Europe and slowed in South America and Asia in the first three months of the year.

Analysts expected the automaker to report earnings of about 36 cents per share, before items, on revenue of $32.3 billion, according to Thomson Reuters I/B/E/S. Ford earned $2.6 billion, or 61 cents per share, on revenue of $33.1 billion a year earlier.

Sales in Europe fell to a 14-year low in March, while sales in South America slowed, in part likely to the the automaker’s older product line there. The economic slowdown in China, the world’s biggest auto maker, has also dampened spending.

Ford has also been loses market share in the U.S. to rivals like Chrysler and Kia, and said itself that it will likely continue losing market share because it can’t produce enough vehicles to meet demand. Still, the automaker reported its strongest March sales since 2007 this year — 223,418 vehicles, a 5 percent increase from the year-ago period.

Going forward, Ford’s fate will rest heavily upon financial markets, which have the ability to sink or buoy consumer confidence and willingness to make big purchases. According to a Guggenheim Securities report, “The automotive industry is economically sensitive and has historically demonstrated meaningful cyclicality as changes in underlying conditions improve or deteriorate.”

Furthermore, the report says, “Fixed costs are relatively high for the industry and as a result the impact to financial performance can be magnified.”

Rival General Motors (NYSE:GM) sells five times more vehicles in China than does Ford, a figure the latter is trying to remedy with its $600 million investment in its Chongqing plant and plans to open four new factories. Ford plans to introduce 15 new cars into the Chinese market by 2015, and its joint venture with Changan Ford Mazda Automobile is expected to expand volume to 950,000 vehicles by 2014.

Ford already witnessed record sales growth in China last year, adding 7 percent though net Chinese auto sales only grew 2.5 percent. It would seem the company needs only to increase production in order to meet demand, but halfway through the first quarter, Ford’s Chinese passenger car sales had shrunk 17.3 percent to 27,375 units, while commercial vehicle sales rose just 0.5 percent to 22,005.

The company is making every effort to improve upon sales, and Fitch Ratings, at least, has faith in its methods, upgrading both Ford and Ford Credit to BBB- from BB+ on Tuesday.

“The ratings are based on Fitch’s expectation that Ford has sufficient financial flexibility to maintain an investment-grade credit profile in a period of economic stress and that Ford would be able to withstand severe automotive market down turn without liquidity pressures,”  Fitch said.

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