Earnings season is here again, an intense yet fun time for stock nerds like me. I had nightmares about the huge drag European losses could have on what was supposed to be a highly profitable first quarter for my Ford Motor Company (NYSE:F). There was an immense amount of good news and numbers delivered in the conference call Wednesday — and it was indeed a highly profitable quarter.
Through all the good news, two things stuck out to me. One was that losses in Europe fell significantly from the previous quarter. Second was that $80 billion in Ford Motor Company (NYSE:F)’s debt actually created more net income than the losses Europe eradicated. Yes, you read that right — Ford Motor Company (NYSE:F)’s debt created more profit than Europe lost.
Here are the facts, by the numbers.
Alan Mulally plans to restore Europe operations to profitability by mid-decade. Photo: Ford Motor (NYSE:F).
Europe: a black hole for profits
For the first quarter, the loss in Europe came to $462 million, a pretty large sum yet $270 million below losses seen in the previous quarter. That gives reason to celebrate for the short term, but as this report was seen as a positive, I expect other quarters this year to reflect a worse number. On the conference call, Ford executives explained that they wouldn’t change expectations and still anticipate losing $2 billion in Europe this year — $300 million more than last year’s total.
Executives also reiterated that they fully plan on being profitable in the region by mid-decade, which would be a welcome relief to Ford’s bottom line — causing EPS to surge.
Now, on to that debt that created more profit than Europe lost.
Automotive debt
Most of you reading this probably know that the majority of Ford’s $100 billion-plus in debt is not automotive debt. As of Wednesday’s report, only $16 billion of Ford Motor Company (NYSE:F)’s massive debt number is attributed to operating the company. The remaining sum is directly under Ford Motor Company (NYSE:F)’s financial division — Ford Motor Company (NYSE:F) Credit. This is where Ford, unlike its competitors, is making brilliant moves.
It takes on huge sums of low-interest loans and dishes the money out to consumers for a nice profit. As the number of consumers buying vehicles and borrowing loans increases, Ford will continue to grow revenues from its Ford Credit finance arm.
In the first quarter of 2013, it raked in $507 million in profit, which was $55 million over the first quarter last year and $93 million more than the previous quarter. If you already did the math, you know that outpaced the losses in Europe this quarter by a cool $45 million. While $45 million does nothing for the bottom line — completely nullifying Europe’s losses with a finance division Ford’s competitors largely lack — is a huge win.
Bottom line
We all hear the doom-and-gloom headlines of Europe’s dwindling automotive sales and billions in lost profits. We never hear that Ford’s finance division creates equally as much profit as Europe loses. Ford has secured these loans at extremely low rates for the long term, and if interest rates rise down the road it should only expand the profit Ford Credit can produce. Imagine the headlines and Ford stock price mid-decade when Ford is breaking even in Europe — or maybe better — and padding all the extra profits from its financial division debt to its bottom line. It’ll be a story worth hearing!
The article Ford’s Debt Creates More Profit Than Europe Lost originally appeared on Fool.com.
Fool contributor Daniel Miller owns shares of Ford. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford.
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