What’s Holding Down Ford Motor Company (F)’s Profitability?

A boost in structural costs
While Ford has no control over long-term interest rates, it is sitting in the driver’s seat with its own cost strategies. The company expects its structural costs to ramp up in the year ahead too, but for good reasons. Increased volume, new product launches, and higher spending on production capacity are all investments that it will be making. And those should benefit future growth, even if they hurt margins in the short term. Running low on factory capacity thanks to overwhelming demand is a good problem to have.

Ford didn’t clue investors in to just how much it expects structural costs to grow this year, except to say that they should rise by more than they did in 2012. That year, Ford saw a $1.5 billion jump in structural costs, so we can expect the category to grow by at least that much.

The good news
The bad news for Ford shareholders is that the company’s operating margin doesn’t look set to expand this year at anything close to the rate we saw in 2012. It might even fall, despite what could turn out to be a banner year of sales. Still, that news isn’t as bad as it sounds.

Most of the impact from these profit headwinds is non-cash in nature. That means that even if operating margins don’t improve this year, operating cash flow is still expected to rise. And cash is what’s really important for funding dividend hikes and debt retirement.

Ford’s profitability growth might be held back this year, but its ability to produce cash looks as strong as ever.

The article What’s Holding Down Ford’s Profitability? originally appeared on Fool.com and is written by Demitrios Kalogeropoulos.

Fool contributor Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford.

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