What’s driving Ford earnings? Not cars

Ford Motor Co. (NYSE: F) recently reported second-quarter earnings results that topped Wall Street’s expectations, but most of its profits came not from its core business of making and selling cars, but from making loans. Ford Credit, the company’s financing operation, contributed 95 percent of pretax operating profits of $1.6 billion. To compare, General Motors’ financing unit, GMAC, contributed 62 percent of total profits.

Ford’s total profits were a mere $83 million. In North America, profits were up only 2 percent year-over-year, despite a strengthening economy. Unit sales, market share and revenues were all down. Making matters worse, many car dealerships are holding high levels of inventory, putting pressure on prices.

Results in Europe were stronger than last year, but business for some of the company’s recently acquired brands, such as Volvo and Jaguar, was down significantly worldwide.

With Ford’s core business not performing, investors should question the sustainability of earnings. Higher interest rates will put pressure on financing profits. In addition, much of the improvement in financing was due to better credit loss performance – for example, repossessions were down to 2.7 percent from 3.2 percent in the previous quarter. If the consumer segment of the economy were to slow down, credit loss performance would likely deteriorate, and the impact on overall company profits could be ugly.

We’re waiting for Ford to turn around the decline in its core automotive business.

Fool’s school

What kind of investor are you? Here is a brief, non-comprehensive summary of major investment approaches.

• Value investors: These folks focus on fundamentals of companies, such as cash flow and expected earnings, aiming to buy stocks for significantly less than their estimated worth. They’re bargain hunters, seeking a sizable margin of safety in their investments.

• Growth investors: These investors seek rapidly growing companies. They’re frequently ready to pay top dollar for such firms, expecting stock values to keep rising as the companies grow. In the past, stocks such as eBay, Amazon.com and Starbucks have made growth investors happy.

• High-yield investors: These folks are primarily seeking cash-generating holdings that offer modest risk. They tend to focus on bonds and stocks with high dividend yields, such as real estate investment trusts (REITs) and preferred stocks.

• Large-cap and blue chip investors: These investors prefer large, established companies with proven track records of profitability. (Examples: Procter & Gamble, IBM, General Electric, ExxonMobil, PepsiCo.)

• Small-cap investors: These sorts are drawn to smaller, younger firms, which can be risky, but offer the chance of greater reward, as they can grow quickly. Small-cap companies can be more obscure and harder to find information on. But as they’re often more focused than bigger, older firms, they’re sometimes easier to understand.

• Mutual fund investors: These people favor mutual funds, where their money either keeps pace with a particular stock index or is invested in holdings selected by professional money managers. Many funds feature outlandish fees and sub-par performance, but other funds can serve you well.

• NAIC investors: These investors follow the teachings of the National Association of Investors Corp., the respected association that has promoted investment clubs around the world for 50 years. (Learn about clubs at www.better-investing.org.)

All these styles are not necessarily mutually exclusive. Your personal investing approach can easily incorporate several. You may look for large-cap companies that are good values, for example, or high-yielding mutual funds.

Learn more about different styles of investing in our newsletters at www.fool.com/shop/newsletters and at Web sites such as Morningstar.com and www.investopedia.com.

Ask the Fool

Q: A few weeks ago, you mentioned that some brokerages charge trading commissions as low as $8 – and sometimes lower. What are the names of some such brokerages? – Peter Vottima, Springfield, Pa.

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For comparison data on brokerages, visit www.broker.Fool.com or the “Benchmarks” page at www.gomez.com for more info.

Q: Where can I find data such as price-to-earnings (P/E) ratios for the S&P 500 stock market index and other indexes? – R.S., Provo, Utah

A: Try clicking over to www.barra .com/Research/Fundamentals.aspx. There you’ll find P/E ratios, price-to-free-cash-flow ratios, dividend yields, return on equity, return on assets, market capitalization and much more for the S&P 500, S&P MidCap 400 and S&P SmallCap 600, among other indexes.