Ford Motor Company reported a 38% decline in first-quarter profit and said it will deepen North American production cuts to reflect falling auto sales.

The automaker is also exploring the sale of its Hertz auto-rental unit.

Net income dropped to $1.21 billion, or 60 cents a share, from $1.95 billion, or 94 cents a share, in the year-ago quarter, the company said in a statement yesterday. Ford, the second largest American automaker, forecast it would break even at best in the second quarter and have a loss as high as 15 cents a share.

“They needed to cut production; they’ve got too many cars,” said Wil Stith, part of a team managing about $2 billion of fixed-income investments at MTB Investment Advisors in Baltimore. General Motors Corporation, which reported a loss of $1.1 billion Tuesday, plans a 12% cut in North American production this quarter.

The drop in first-quarter profit and the prospect for a second-quarter loss threaten Chief Executive William Clay Ford Jr.’s three-year streak of improved financial performance. The company said its auto operations may not earn a profit this year, leaving it to rely on auto loans to sustain profits. Ford Motor, of Dearborn, Mich., earned $3.49 billion last year.

The company may sell its Hertz rental-car unit, executives said yesterday. “Now is the right time,” to explore the future of Hertz, Bill Ford, 47, said on a conference call.

“We are evaluating our strategic options with Hertz. Let’s leave it at that,” said the chief financial officer, Don Leclair, on the same call.

Excluding some costs, Ford was expected to earn 39 cents a share in the first quarter, the average estimate of analysts surveyed by Thomson Financial. On that basis, profit was $1.26 billion, or 62 cents. Ford’s revenue rose to $45.1 billion from $44.7 billion a year earlier.

The company’s bonds and shares strengthened. Ford Motor Credit Company’s 7% note due 2013 rose 2 cents to 89 cents on the dollar as its yield fell to 8.86% at 12:03 p.m. in New York, according to Trace, the bond price reporting system of the NASD.

Ford shares rose 6 cents to $9.34 in New York Stock Exchange composite trading. They had fallen 37% this year through Tuesday.

The results announced yesterday were above Ford’s initial first-quarter forecast of 25 cents to 35 cents a share, excluding some costs. Ford on April 8 said that the first quarter would exceed projections but didn’t supply a specific figure.

The company forecast that second quarter results, excluding some costs, would range from break even to a loss of 15 cents a share. That forecast is below the Thomson Financial average estimate of a 38-cent profit.

Ford deepened cuts in its second quarter North American production plans to 4.8% below a year earlier, from the previous 1.2%. Ford now plans to build 905,000 vehicles in North America this quarter, down from the previous forecast of 940,000 and its year-earlier output of 951,000.

Ford’s worldwide automotive operations had a first-quarter profit of $579 million, down from $1.83 billion, as sales of cars and light trucks in America fell 5.2% and production declined about 10% in the quarter. Production cuts affect profit because automakers record revenue when cars and trucks are shipped to dealers, not when they are sold.

General Motors’ $1.1 billion net loss reported Tuesday was its biggest quarterly loss in 13 years. Its U.S. sales fell 5.1% in the first quarter, and its market share is at an 80-year-low.

“What it comes down to for both companies is the need to cut costs: pensions, health-care, benefits,” Dan Genter, president of Los Angeles-based RNC Genter Capital Management, said in an interview before GM and Ford earnings were released.

Ford’s debt is rated BBB-, the lowest investment grade by Standard & Poor’s. S&P on April 8 revised the outlook on $173 billion of Ford debt to “negative,” meaning it is more likely to be downgraded than remain stable or be upgraded. “We now view the rating as weak,” S&P said of the BBB- rating.

S&P issued its statement 20 minutes after Ford released its revised 2005 forecast.

Moody’s Investors Service announced April 5 it was reviewing Ford for a possible downgrade. Moody’s rates Ford as Baa1, three levels above non-investment grade, and Ford Motor Credit as A3, four levels above non-investment grade.

Ford, in slides prepared for a conference call today, said its full-year outlook for North American auto operations was “worse” than the $1.4 billion to $1.7 billion pretax profit it forecast on January 25.

Net income at Ford Motor Credit Company, which makes car and truck loans, rose to $710 million from $688 million. Ford Credit generated more than 80% of the company’s net income last year. The 2004 first quarter was the first time in four years that Ford’s automotive profit exceeded results of its financial unit.

Ford Credit, in a separate statement, said its higher earnings stemmed from “improved credit loss performance.” The unit has concentrated on reducing the number of bad loans since late 2001.

Higher gasoline prices are pinching demand for Ford’s bigger trucks and sport-utility vehicles, which are less fuel-efficient than many of the vehicles its Asian rivals produce.

Sales of Ford’s profitable truck models fell during the first quarter, with its F-Series pickups, the top-selling line of vehicles in America, declining 9.4%. Sales of its Explorer, the top-selling sport-utility vehicle, slid 25%. The FSeries alone generated 28% of Ford’s U.S. vehicle sales in 2004.

Sales results of the company’s new models have been mixed. Sales of the redesigned Mustang sports car increased 16% during the first quarter. Its new Five Hundred sedan and Freestyle wagon got off to a slow start, with the Chicago plant that makes the Five Hundred, Freestyle and Mercury Montego operating at only 85% of capacity.

Under Mr. Ford, who took over from Jacques Nasser in October 2001, Ford rebounded from combined net losses of $6.4 billion in 2001 and 2002 to a profit of $3.49 billion in 2004. The $1.95 billion net income of 2004’s first quarter was the highest during his tenure.

Ford eliminated 33,811 jobs, or 9.4% of the company’s workforce, from 2002 through 2004, according to regulatory filings. The company is making buyout and early retirement offers to pare another 1,000 U.S. salaried jobs.