Is Ford Running Out of Steam in Europe?

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Ford Motor Company's (NYSE: F) pre-tax profit in Europe fell sharply in the second quarter, to $88 million from $467 million a year ago -- a $379 million drop. 

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On the one hand, at least Ford is making money in Europe. Rival General Motors (NYSE: GM) is in the midst of selling off most of its European operation after years of losses and a frustrating attempt to restructure its business.

Ford has deep roots in the Old World and isn't likely to follow its Detroit rival's lead by abandoning the European market. But the big profit drop deserves a closer look: Was it a fluke -- or is Ford headed for a period of GM-level frustration? 

Ford's CFO: Three factors behind the decline

This slide, from Ford's second-quarter earnings presentation, sums up the factors behind Ford's year-over-year profit decline in Europe. 

But it doesn't quite tell the whole story. so I asked Ford's chief financial officer, Bob Shanks, to explain what happened. Shanks told me that there were really three factors behind the year-over-year drop. The biggest? Brexit. 

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"We were down $379 [million], and about half of that is Brexit," Shanks said. He explained that there were several effects related to the U.K.'s decision to leave the European Union, but the one that had the biggest impact on Ford's profit was simply the year-over-year decline in value of the British pound. 

As you can see on the slide, "exchange" had a $103 million negative impact on Ford's bottom line in Europe. That's mostly the pound, Shanks told me, offset somewhat by weakness in the euro. 

There were other Brexit-related impacts, Shanks said. The pound's decline has led Ford (and other automakers) to raise prices, which helped Ford's profits, but that in turn has put a damper on new-car sales in the U.K. -- which Ford, as Britain's best-selling car brand, feels more acutely than rivals. 

The net impact of all of the Brexit-related effects accounts for about half of the $379 million year-over-year profit decline, Shanks said. Year-over-year increases in commodity prices, particularly the price of steel, was the second factor, accounting for about $69 million of the change.

But the third factor is arguably a good story for Ford -- or at least, it will be later in the year. 

A sales decline with a good cause

That third factor? Ford just launched an all-new version of the Fiesta in Europe, and it expects the all-new Fiesta to deliver more profits than the old model, at least in time. 

That's a bigger deal than you might think. Here in America, we don't think of the Fiesta as all that important -- the little Ford isn't a big seller compared to the Blue Oval's trucks and SUVs, and it isn't a very big contributor to the bottom line here.

The story is very different in Europe, where the Fiesta is Ford's best-seller -- and one of the Continent's best-selling vehicles period, year-in and year-out. That makes it a very big deal in Europe, and an important part of Ford's global product portfolio. And it means that when Fiesta supplies are tight, as they were during the second quarter, Ford's overall results in Europe take a hit. 

Shanks noted that Ford's global sales fell by about 43,000 vehicles in the second quarter, compared with the second quarter of 2016. About 55,000 of those, more than the entire drop, were in Europe, he said, and nearly all of that was related to the launch of the Fiesta. Dealers had sold off most of the old models just as the all-new Fiestas were beginning to arrive, meaning that supplies were very thin -- and dealers can't deliver cars they can't get. 

"Those three things completely explained the decline," Shanks said.

The upshot: Things could improve from here

Ford's full-year guidance for Europe calls for a total pre-tax profit of less than the $1.205 billion it earned in the region in 2016. It has said that exchange rates and higher commodity prices will hurt, but improved sales volumes and a more profitable "mix" of products sold will help. We saw how that unfolded in the second quarter. 

Through the first half of 2017, Ford has earned $264 million in pre-tax profit in Europe, down sharply from the $901 million it earned in the first half of 2016, before the Brexit decision had an impact. 

With the new Fiesta launched, and the British pound possibly stabilizing, there's a good chance that the second half of the year will look a lot better than the first -- but either way, we'll have a better understanding of how Ford will fare in post-Brexit Europe. 

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John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.