Ford Earnings Bring Up A Lot Of Tough Questions

  • Ford's stock sold off by 5% due to the company reporting a miss on its EPS metric.
  • Tax rate that analysts calculated was on the low side, which also could have affected EPS.
  • Ford does excellently in North America but continues to lose money in South America and Europe.
  • Q4 is set to slow down due to payments to workers and higher seasonal costs. Momentum must be picked up once more in Q1 of 2016.
  • North America is crucial. If this market slows, Ford will be in big trouble.

Ford Earnings Disappoint

Ford Motor (NYSE:F) not surprisingly came out with strong earnings on the 27th of October for the third quarter of 2015. Revenues rose to $35.8 billion, which was a beat of more than $700 million. But the principal reason why the stock sold off more than 5% was the EPS number which came in at $0.45 which was a slight miss on earnings expectations ($0.465 estimated) for the company. We have seen in this sector that beats have to be attained in earnings for the respective stock to rally. General Motors (NYSE:GM) didn't do Ford any favors with its earnings beat for Q3 (both on revenue and EPS, rallying 5%+ in the process) and probably raised expectations quite a bit for Ford. Therefore it was disappointing Ford missed on the EPS metric which caused the stock to sell off especially when you consider net income rose to $1.9 billion which was 129% greater than the quarter of 12 months prior. Nevertheless there is no doubt that Ford is growing strongly. Its latest set of earnings demonstrated growth across all the important metrics (revenue, cash-flow, net income, etc.) So were there any other reasons the stock sold off ? Let's discuss other possible reasons and where I believe this stock is going long term.

Analysts Estimated Lower Tax Rate

Firstly apart from the lower EPS number reported, the tax rate reported by the company came in at 33% which was slightly higher than analysts' projections of 32%. The CFO Bob Shanks stated in the earnings conference call that street analysts wrongly calculated the tax rate in their earnings calculations. As a result Ford's slightly higher tax rate meant that its EPS figure came in lower than analysts expectations.

Ford Earnings - Some Other Key Questions

Another reason why Ford didn't meet EPS expectations would be too much optimism on the street especially towards the auto-maker's F150 truck. Many believe that the unbelievable growth in sales this truck has experienced was down to its looks, value and price. However, now because profits are slightly below expected, investors are wondering how much capital goes into promoting this truck. Are discounts given to dealers to deliver the volume levels it is currently experiencing?

Moving away from North America, Europe continues to hemorrhage money even though the company saw top-line growth in volume and revenue and a reduction in its year over year loss of 60% ( losses down to $182 million from $439 million in Q3-2014). Investors may feel here that the company is being too vague on when the auto-maker will return to profitability. It was already mentioned in the second quarter of this year that the company was very close to breaking even but it still hasn't happened. Furthermore Bob Shanks refused to be drawn on whether the auto-maker would turn a profit in Europe in 2016 in a Bloomberg interview. Again this forward looking commentary needs to be better for investors to flock to this stock. Investors still don't know if and when Ford will turn a profit in Europe which is disappointing considering the huge investment that has been ploughed into that market since 2012.

South America came in with a loss of $163 million which wasn't that bad considering the economic challenges and currency problems some key markets are going through at the moment. Sales and profits were down in the Asia-Pacific region (profits down to $20 million from $24 million in Q3-2014) as China is definitely going through a slow down. Volumes were down this quarter but guidance for Q4 is strong as some new product launches are expected to get to market which should boost sales there. This forward commentary for China was encouraging but profitability generally across the company is expected to be adversely impacted by payments to union workers and higher seasonal costs.

What Now For Ford's Stock Post Earnings

Where do I see the stock going long term? Obviously the company is growing strongly especially in terms of revenue and net income but North America remains crucial for this company due its average performance overseas. I just see it as too risky to go long on this stock when you consider it is really only thriving in one market at the moment. The US is by far the strongest economy out there at the moment but will it be able to keep charging ahead with these present growth rates? Adam Jonas from Morgan Stanley doesn't think so and has gone bearish on this stock. Why? Well, the US may be the final shoe to drop before the world enters a harsh global recession. Caterpillar (NYSE:CAT) for example had declining sales in all international markets before finally sales dropped in North America. This is why Ford needs support in its international markets, and soon, for investors to become interested once again in this stock. Otherwise, even the seemingly low valuations for Ford might not be enough to lure investors.

To sum up, Ford missed on earnings primarily because its EPS came in lower than expected. Its tax rate was higher than analysts calculations and forward looking commentary wasn't great regarding revenues for Q4. I just think that investors are wary of the situation in the US. The Fed still hasn't raised interest rates which illustrates to me that this so called recovery is very fragile. Furthermore commodities are coming out of a major low and if they rally substantially, they will increase Ford's fixed costs meaningfully. Is there more room to grow meaningfully in North America? Investors seem to think that presently there isn't.

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