Ford Motor Company: Quality of p y y Earnings Growth Analysis (A)
Ford Motor Company
Earnings improvement over past 3 quarters have come from accounting adjustments Nov 11, 2003
Common stock price: $13.14 52-week range: $6 to $13 (Still some 60% below its beginning 1999 price level)
Incorporated in Delaware Incorporate in 1919 Acquired: Ford Motor Company, Michigan Company incorporated in 1903 Acquired to produce and sell automobiles designed and engineered by Henry Ford d In 2003: Worlds 2nd largest producer of cars and trucks combined f Along with its subsidiaries engaged in other business as well..,
Financing Renting vehicles and equipment
Ford Motor Company
Two principal business sectors include..,
Automobile – design develop manufacture sold and serviced design, develop, manufacture, cars and trucks Financial services.., –
Companies include include.., Ford Motor Credit Company The Hertz Corporation – rented out cars, light trucks, industrial and construction equipment Engaged in.., Vehicle related financing Leasing Insurance
In 2003: two years into revitalization plan aimed at..,
Reversing a declining market share Turning losses into profits High-incentive spending – –
2002: $3,000 2001: $1,200
Reduction R d ti workforce kf Introduction of new cars production 2004 (500 Sedan) Aggressive cost cutting –
End of 2003: $1.3 billion
Improved product quality Reduction of plant capacity Divestutures Discontinuance o flow margin models – Ford Escort Redesign of the F-Series pickup
Low interest rates and high profitability achieved g y
Persistent losses incurred by the company’s European operations – lost $1,2 billion over the first nine months of 2003 In 2003: takes charge of $600 million for restructuring its European operations
$56 million of which was recognized in 3rd quarter 2003 income statement Company expected the restructuring to contribute $450 million to 2004 operating earnings and about $550 million per year
Financial Results by Major Business
Automotive sector A t ti t Financial Services sector Income/(loss) before cumulative effect of change in accounting principle Cumulative effect of change in accounting principle Total company net income/(loss)
First Nine Months Net Income/(Loss) 2002 -805 805 957 152 -1002 -850
Unusual It U l Items Included in Ford’s I l d d i F d’ Nine Months Results (in Millions) First Nine Months Benefit/ (Charge) B fit/ (Ch ) 142 -525 -141 141 -46 -570 570 -457 -113
Interest Income on U.S. federal tax refund Loss on sale of Kwik-Fit and other businesses SFAS No. 133 non cash charge No non-cash Non-cash accrual for European end-of-life vehicles directive Total unusual items Memo: Automotive sector Financial Services sector
Accounting Related Observations
Underlying profitability did not appear to be improving i i Had made a no. of accounting adjustments that contributed roughly $2 billi of earnings t ib t d hl billion f i improvement over first nine months of 2003 Doubt – company distorted results?
Do you agree with the conclusion that ‘a meaningful amount of Ford’s F d’ earnings i i improvement over th t three quarters h come f t has from accounting adjustments, as a opposed to real improvements in the company’s underlying profitability?
What a adjustment, if any, would you make to the 2003 first nine month first-nine-month earnings to determine if 2003 ninenine month earnings did or did not represents a ‘real’ improvement?
Do you agree with Ford’s measurement and assessment of the value to investors of 1) its automotive segment’s total operating-related cash-flows, cash...
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