Trucks, SUVs build profits for auto companies' futures
Profitable trucks and SUVs continue to be Detroit’s answer to plateauing sales, this week delivering third-quarter results that impressed investors and pushed the automakers’ shares higher.
Ford Motor Co. said Thursday that its iconic F-Series trucks helped boost profits 63 percent compared to a year ago. Fiat Chrysler Automobiles NV saw a 50-percent increase in profits thanks to pricier Jeeps and Ram trucks. And General Motors Co. continued to make impressive money on SUVs and crossovers despite one-time charges related to the sale of its money-losing European businesses.
The irony: All three companies, led by GM and Ford, packed October with long-term pledges to boost investment in self-driving cars, electric vehicles and future line-ups. That’s even as Detroit’s automakers demonstrated an ability to boost profits with profit-rich trucks and SUVs despite sales edging back from record levels.
“The success of some of FCA’s key brands at a time of unprecedented technological change may accelerate a reassessment of value,” Adam Jonas, Morgan Stanley analyst, wrote in a note anointing FCA its top auto stock. “FCA’s track-record in strategic value enhancement speaks for itself. Embedded within the FCA portfolio are some of the most attractive brands in the auto industry — specifically, the Jeep business, the Ram franchise, the Maserati brand.”
The potential for CEO Sergio Marchionne’s long-term plan to deliver promised results in 2018 is increasingly exciting the investment community. His method could act as a map for Ford’s Hackett, analysts say, as he lays out his plan for the Blue Oval.
Ford made $1.6 billion in the third quarter — almost all of which came from North American auto operations — and posted earnings per share of $.39, beating analysts’ forecasts. The results came after Hackett’s first full quarter.
Ford characterized the results as “balanced” and “high quality.” Hackett attributed strong results to a focus on internal cost cutting and a new focus on what he calls “financial fitness.”
Analysts still want more. Hackett fielded some questions about Ford’s mobility and self-driving efforts, but analysts focused more intently on changes to the traditional pieces of Ford business that deliver the vast majority of its revenue and all of its profit.
“It’s still a lot of the same as it ever was,” said Dave Sullivan, analyst with AutoPacific. “F-Series continues to fuel profits,” and there’s yet to be any clarification on how Ford will function as an automaker and a mobility company. “I really expected to get something we could sink our teeth into, but we didn’t get that.”
When Hackett presented his 100-day assessment of Ford at the beginning of October, experts and analysts later complained he didn’t give clarity in New York. He told investors he plans to eliminate $14 billion over the next five years from materials costs and engineering alone, to cut the number of customizable options on vehicles, to trim development times and to leverage partnerships to drive foreign business and autonomous vehicles.
He wants to divert money from the development of passenger cars and internal combustion engines, and invest that in trucks, SUVs and electric vehicles. He has said several times since taking over as CEO that the company needs to be more financially fit.
The CEO wants more time. When prodded by analysts Thursday about his plan for Ford Smart Mobility LLC, Hackett promised more to come but did not offer specifics. He repeated what’s he’s said for a few months: Ford is cutting costs now to boost profitability and prepare for the future.
“Our approach is to link what we know now with what we imagine the future to be,” he told investors. “We’re bridging the two in a way that satisfies our customers and provides a clear roadmap for investors.
“I know you’re looking for specifics here. I get questions from Oct. 3 about where the specifics are to the detail and strategy story that we’ve laid out. There are real things coming from us on that strategy” for smart vehicles in the future.
Hackett also said some aspects of the company still need attention, a sign Sullivan interprets to mean that the CEO is continuing a critical look at some parts of the company.
Bolstered by trucks and SUVs, Ford’s North American region effectively accounted for all of the automaker’s third-quarter automotive profits, totaling $1.7 billion. The Blue Oval lost money in most other automotive markets. Ford posted a $158 million loss in South America, a $86 million loss in Europe and a $60 million loss in the Middle East and Africa segment. The Blue Oval made $289 million from its Asia Pacific segment.
Ford lost money in South America for the third quarter this year. Since 2011, the company has lost $2.6 billion in that region, including a $1.1 billion last year. Hackett could immediately boost profitability by cutting out that part of the business, Sullivan said.
Ford has given no indication it plans to leave any region of the world, a once-unthinkable notion that GM already is doing. The Detroit automaker ended 20 years of loses in Europe by ditching those operations this year. It cost GM $3 billion this quarter, but the company’s top executives say it will bring long-term shareholder value and growth for a company seeing a surging share price in recent months.
Ford needs a move like that, Sullivan said. But it will take time with a CEO like Hackett, who appears to be revisiting segments of the company that had been written off by other leaders such as small cars.
Ford shares rose 1.91 percent on the day to close at $12.27 per share. Since Hackett took over in late May, shares in the Blue Oval have gained around $1.10, a roughly 10 percent increase. GM shares, by comparison, have gained roughly 20 percent since July.
“It’s not like the company is incinerating cash,” Sullivan said. “There definitely needs to be some well thought out decisions made. I don’t think it’s the time to make knee-jerk reactions. He wants to see if there’s potential with things before he pulls the plug. It’s not this instant satisfaction that I think we were looking for.”
The company now expects full-year adjusted earnings per share to come in between $1.75 and $1.85 per share, compared to $1.76 per share in 2016 and increased from forecasts earlier this year.