- Although revenues are rising due to US fleet sales growth, profits are slipping which is worrying.
- The US (Ford's largest market by far) is due for a pullback. Is this priced into the Ford stock?.
- Can Ford steal more market share in pickups especially in a declining market? Can the Super Duty make an impact?
Ford Motor Company (NYSE:F) announces its 3rd quarter 2016 earnings on the 27th of October. Analysts will be looking for $0.22 in earnings per share on top of revenues of just over $33 billion. Ford share price is in a precarious position in the sense that it is now trading at just above $12 levels which is below strong support levels. Furthermore, the stock lost around $1.13 per share or 8% of its value the same day the company announced its second-quarter earnings back in July. I have written in the previous commentary that Ford holds more risk to the downside than potential reward to the upside. I still maintain this view despite the attractive 5%+ dividend yield. At this stage, I fail to see how Ford will be able to achieve it's 2016 revenue and earnings guidance. The question is whether probable poor numbers in the 3rd and 4th quarters are already priced into the stock. This is what dividend investors will want to ascertain. Here are the metrics that will be watched closely when the company announces on the 27th.
The Stock Tanked After Second Quarter Earnings Due To Poor Profitability
First, let's take a look at Q2 where Ford's adjusted EPS of $0.52 came in well below analysts estimates of $0.60. As already mentioned the stock plummeted in the aftermath despite Ford bringing in $39.5 billion in revenue. Q2 turnover was over three billion higher than what analysts had expected but this didn't stop the share price from tanking. Higher expected revenues and lower expected earnings can only mean one thing - lower margins. In fact, Ford's gross margin fell in the second quarter to 12.4% which was a 3.8% decline over the second quarter in 2015. Furthermore, the company's EBITDA margin fell to 8.4%, which was a 2.6% drop over the same quarter of 12 months prior. If these poor profit margins continue, I just can't see Ford achieving it's new pre-tax profit guidance (Updated figure is $10.2 billion due to recent recalls) for 2016.
European & Asian Markets Will Need To Remain Strong
Investors will be looking to see what the revenue mix looks like in the third quarter. North America once again delivered last quarter, producing $23.8 billion in revenue out of the total $39.5 billion take. However, with F-series truck sales on the decline in recent months plus higher fleet sales being thrown into the mix, margins will continue to come under pressure in the near term. Therefore the European and Asian markets need to keep delivering. Last quarter, the top Line in Europe increased by $1.1 billion and in Asia by $400 million. These markets need to keep delivering especially in the face of a probable cyclical top in the U.S. in the near-term.
How Much Of Current Headwinds Are Temporary?
The difficulty that investors face regarding Ford's Q3 earnings is whether the company's current headwinds will remain temporary. This really is the crux of the issue. For example, Ford had stated that the guidance reduction is not down to core demand problems, but more down to the recall situation, the Brexit debacle and higher expenses than usual due to investment in new vehicles. However, the automobile manufacturer seems to have changed its stance after we got the September numbers for the company.
How Long Will Demand Remain Subdued?
In fact, Ford's F-series pick-up sales fell by 2.6% in September which is worrying as it's the product line that generates the highest profit, by far, for the company. Ford has responded quickly by announcing that it will suspend production temporarily at multiple plants and match production to demand. This is perfectly normal as the back end of 2015 was a bumper period for the company. However, if this demand slowdown persists, then we could be looking at much lower numbers from Ford from 2017 onward. The real question is "How much will the market drop from its 17.74 million SAAR level in September and how much negative growth is priced into Ford's stock". Third quarter earnings and specifically forward-looking guidance will give investors more clarity in this area.
To sum up, Ford has it all to do in the third quarter to convince investors to stick with the company for the long haul. Management came out recently and stated that the dividend was safe which is a worry in itself as the company now enters a different landscape. Profitability will be first on the agenda. It has to deliver and new models such as the all new aluminium Super Duty will need to steal market share if truck sales continue to slide.
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