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Ford: A Tale of Two Continents

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The new Ford (NYSE:F) C-Max compact hybrid crossover is "flying off the showroom lots," said Chief Financial Officer Bob Shanks. But in Europe, auto sales are so weak that Ford had to delay introduction of the Mondeo, a Fusion variant, from 2013 to 2014.

The juxtaposition of the reception, or lack thereof, for the two new vehicles summarizes the situation Ford outlined Tuesday on its fourth-quarter earnings call: record profit in North America combined with continued losses in Europe's ugly auto economy.

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The European outlook is even worse than it was in October, when Ford announced a restructuring plan that included closing three plants and taking a $1.5 billion loss for the year. On Tuesday, the loss in Europe turned out to be $732 million for the fourth quarter and $1.8 billion for the year, and Ford said the loss will grow to $2 billion in 2013.

Can growth in North America overcome the stall in Europe? Investors don't think so. In midday trading, Ford shares were down $.82 to $12.96.

Ford shares soared in the latter part of the fourth quarter of 2012. They closed at $10.50 on November 15 and ended the year at $12.95. Shares started 2013 at $13.23 and rose as high as $14.30 in mid-January. While this is not at all the Apple (NASDAQ:AAPL) story, it seems clear that the optimism about the automaker's overall short-term outlook has confronted a relatively disappointing reality.

On the earnings call, Shanks detailed the contrasting continents' situations, forecasting that European full-year industry volume will be at the lower end of an estimated 13 million to 14 million units, and that Ford will have to bear the cost of restructuring, investment in new products, and accelerated depreciation for plants that will close. Delaying the introduction of Mondeo, for instance, represents an opportunity cost of several hundred million dollars, he said.

Looking ahead, Ford anticipates it will all pay off some day, just as it did in North America. By mid-decade, the company expects it will be generating profits in Europe.

"We will continue to look at the way we transformed the business in North America," said CEO Alan Mulally. "The most important thing is to continue to invest in the products. We can bring the very best cars and trucks to Europe even with the current slowdown, (and) also continue to be there with a complete family of cars as the recovery starts to happen."

North America could not look more different. Shanks said Ford launched the new Escape and the new Fusion late last year and expects "significant gains from both these products in 2013 in terms of share contributions," particularly because the two vehicles were in short supply last year. C-Max was introduced in September, an all-hybrid vehicle that seems to be mounting a challenge to the most successful green car ever, the Toyota (NYSE:TM) Prius.

Additionally, pickup truck sales should be stronger this year as housing construction and oil production both gain. "You know our strength in that particular part of the business," Shanks said. The F-150 has been the best-selling US vehicle for three decades. Also, the industry as a whole is growing and Ford has boosted capacity by 400,000 vehicles.

But even the North American growth won't push Ford margins above 10%, Shanks said. Rather, he said, growth is being accompanied by higher costs for everything from pensions, which require higher contributions when interest rates are low, to the cost of added production to the conclusion of several years of amortization of health care plans. So while operating cash flow should be higher in 2013, profits will be flat, Shanks said.

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