Ford, GM expected to lose more than $1 billion combined in Europe
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DETROIT (Bloomberg) -- General Motors Co. and Ford Motor Co., struggling to reverse growing losses in Europe, will each post plunging third-quarter profits this week as they take different paths to fixing their operations in that economically ravaged region.
Ford, which will post results tomorrow, said Oct. 25 that it's closing three factories in Europe and cutting 6,200 jobs, or 13 percent of its workforce there.
GM, which announces its results on Wednesday, said last week it would develop small and mid-sized cars, vans and SUVs with PSA Peugeot Citroen, in which it took a 7 percent stake in February in an alliance aimed at cutting losses by sharing costs.
Neither move enabled GM or Ford to avoid operating losses of more than $500 million each in Europe in the third quarter, estimated Adam Jonas, an auto analyst at Morgan Stanley. Ford's action, though, is more definitive than GM's agreement with Peugeot, which may not be finalized by a self-imposed deadline of Oct. 31.
"Ford has already announced their plan and they're getting it done," said Matthew Stover, auto analyst with Guggenheim Securities in Boston. "Ford controls its own destiny in Europe, while GM has cast its lot with PSA and that is getting more complicated by the week."
Auto sales in Europe may fall to their lowest level in 19 years as the sovereign-debt crisis has saps consumer confidence.
Favorable opinions
Despite the setbacks in Europe, investors aren't betting against the stocks. Jonas at Morgan Stanley recommends both. North America sales and profits continue to be strong and the bad news in Europe is well-known.
Ford said auto sales in Europe may fall further next year before a slight recovery in 2014.
Ford said Oct. 25 that its pretax profit and earnings per share in the third quarter will top the second quarter's $1.8 billion and 30 cents a share.
GM has lost $16.8 billion in Europe since 1999, while Ford has fared better, earning $1.73 billion since 2007. Ford said it will lose more than $3 billion in Europe this year and next as it restructures and will return to profitability by mid-decade.
"Ford of Europe is a going concern and their attitude seems to be, 'Let's get this done while there's a crisis, get out of the headlines and let others catch up,"' Jonas said. "GM is almost too weak to salvage. We think their Plan A is to partner."
Peugeot 'progress'
GM CEO Dan Akerson said "there is progress" in implementing an alliance with France's Peugeot. If the companies fail to reach agreement by the Oct. 31 deadline in their memorandum of understanding, "it also allows for postponement," he said in an Oct. 21 interview in Sao Paulo.
The French government on Oct. 24 committed $9 billion in state credit guarantees to Peugeot's finance unit to help prop up Europe's second-largest automaker. In return, the government said it wants an "employment solution" for each of Peugeot's workers, which may conflict with the company's plans to close a plant in Aulnay, near Paris, and eliminate 8,000 workers.
GM, also beset with excess factory capacity that is plaguing European automakers, has said it plans to shutter its plant in Bochum, Germany, the first car factory closure in that country since World War II. The automaker doesn't plan to close the plant until 2016.
Moving faster
Ford is moving faster. It said next year it will close a Transit van plant in Southampton, England, and a stamping plant in Dagenham, on the outskirts of London. In 2014, Ford plans to close a factory in Genk, Belgium, that builds the Mondeo mid-sized car, the S-Max wagon and the Galaxy minivan.
"Ford is winking across the table at their big competitors, saying, 'Come on guys, where are you?"' Jonas said. "They all have pressure on them."
GM and Ford are each cutting production in Europe and reducing dealers' inventory of cars and trucks. That will reduce revenue at each company.
GM's third-quarter revenue may have slipped to $35.9 billion, the average of eight analysts' estimates, from $36.7 billion a year earlier. GM's earnings before interest and taxes may have dropped 39 percent to $1.35 billion, the average of six analysts' estimates.
Ford's third-quarter revenue may have fallen to $31.2 billion, the average of 11 analysts' estimates, from $33 billion last year. Pretax profit may have slid 4.6 percent to $1.76 billion, the average of seven analysts' estimates.
North America
The woes in Europe are more than offset by profitable North American operations at GM and Ford.
In the first half of the year, GM earned $3.66 billion in North America before interest and taxes, up from $3.5 billion in 2011's first half. GM's U.S. car and truck sales are up 3.4 percent so far this year to 1.97 million vehicles, according to the Automotive News Data Center.
Ford earned $4.14 billion in North America in 2012's first half and had an operating profit margin of 10.8 percent in an industry where a 5 percent margin is considered respectable. Ford's U.S. car and light truck sales rose 5.3 percent through September to 1.69 million, according to the Data Center.
Better cars
As each automaker has fielded more high-quality models, such as the Ford Fusion midsize sedan and GM's Chevrolet Sonic small call, they are commanding higher prices in the showroom. The average price a consumer paid for a Ford model rose to $32,535 this year, up from $28,750 five years ago, according to researcher Edmunds.com. GM's average transaction price rose to $32,582 this year from $28,826 in 2007, Edmunds said.
Rising sales and profits in the U.S. drove Jim Kee, president of South Texas Money Management, to buy 1.2 million shares of Ford and 500,000 shares of GM in February. He saw the stocks as "cheap" and is betting they will rise 30 percent to 50 percent, despite the troubles they face in Europe.
"We didn't buy them with a robust European view in mind," said Kee, whose fund manages $1.9 billion in assets. "Our play is more the rebound here in the U.S. and the housing rebound. There's been an increase in construction spending and that's a big tailwind for producers of light and medium-sized trucks like Ford and GM."
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