Read our analysis of Ford stock and where the company is headed in our Ford Q4 2015 earnings review.
- The F-150 truck is expected to continue outperforming despite having higher manufacturing costs . Therefore top line sales need to be robust.
- The Chinese tax cut in the auto industry significantly helped Ford's sales in the final quarter of 2015. Will the market take notice?
- Ford stock is still trading quite a bit below its 200 weekly moving average. There will be plenty of time to go long this stock.
Ford Motor (NYSE:F) announces earnings for its fiscal fourth quarter on the 28th of this month and the auto manufacturer is in line to have a breakthrough year. Analysts are expecting an EPS of 0.48 on revenues of $36.32 billion which tops figures from the fourth quarter of 2014 by some margin when it reported an EPS of 0.26 on sales of $33.8 billion.
Nevertheless, despite the bumper year to come, Ford stock is still down almost 20% compared to its price 12 months ago which for long-term investors is a cause of worry. Here you have a company with an extremely low forward price to earnings ratio of about 6 and the market is still not responding. Analysts are expecting Ford to increase its top line by almost $5 billion next year on an EPS of 1.95 but sentiment on Wall Street remains neutral at best.
One of the principal reasons for the Ford stock's poor performance in January thus far was its guidance with respect to margin for 2016 in North America. Ford is guiding an operating margin of 9.5% which is lower than the last three quarters average of 10.8%. This means the company will have to move more units (than originally expected) to meet guidance which may be a struggle if economic activity weakens in 2016. In an attempt to put a floor on the stock, Ford announced a cash dividend of $0.25 which will be paid out in March along with the regular dividend of $0.14. But if you are a Ford investor, here are things to watch for in its upcoming earnings announcement.
Firstly North America is the key and sales should have been boosted in the fourth quarter (probably to the detriment of some margin) as a result of the company's elevated marketing spend in November and December. Ford's best selling F-150 truck sales are going to be crucial in 2016 as the new aluminium version may be one of the reasons why guidance on operating margins is weaker in 2016.
This is probably due to the higher manufacturing costs associated with the F-150, so achieving 2016 revenue guidance is crucial to the US market and specifically, the commercial division is the area where analysts feel sales will rise the most. North America is by far Ford's strongest division accounting for 50% of sales so this market needs to stay strong until at least the market can see growth potential in other markets.
The market hasn't rewarded Ford for a bumper last year in North America because this industry is historically cyclical meaning that US growth in particular can't last. Therefore, watch growth levels of other models in North America as they will provide guidance on whether the company can indeed achieve pre-tax operating profit of at least its $10 to $11 billion guidance for 2015.
The second thing I would watch out for is growth rates in China which is Ford's second biggest market. In terms of market sentiment, the Chinese market has the potential to be a game-changer for Ford if the company can post positive top line growth for a series of quarters. Up to now, this hasn't been the case. Ford's top line grew by 19% in 2014 as opposed to only 3% in 2015.
Ford is expected to continue making profits in 2016 but growth rates need to change for the markets to take notice. Fourth quarter earnings in China will be very interesting because the Chinese government implemented a tax cut last October which boosted sales in the region (13% hike in sales compared to October in 2014). This enabled Ford to post a 7% rise in China last October and a whopping 27% increase in sales in December.
I expect elevated growth going into 2016 as the tax cut has, at least, another 11 months to run. If Ford can use this period to cement an established position in China (by gaining market share against the likes of Volkswagen who still are struggling), the market just might take notice going forward.
With earnings coming up, lets take a look at the chart and see how the technicals are behaving. As the chart shows, the 200 weekly moving average is $13.57 which is well above the present stock price of $12.15. Considering the drop Ford stock experienced in the past, I'm not comfortable owning this stock below its 200 weekly moving average.
Ford could easily deliver another stellar set of earnings but the market may once again ignore the momentum the company is definitely generating. Implied volatility is high going into earnings so one could take on a trade known as a "Reverse Jade Lizard" which doesn't have any downside risk if the trade is put on properly. In my opinion, all the risk is to the downside in Ford stock and buying the stock just to collect the "special dividend" at this point is a long term risk if the macro picture deteriorates from here.
To sum up, investors will be watching with interest, sales of the F-150 and Chinese auto sales in the last quarter of last year. Both of these areas are gaining traction and may provide the reasons for Wall Street to start viewing Ford stock differently. The sentiment is still neutral as Ford stock is trading well below its 200 weekly moving average. Don't be fooled by the company's low valuation. There is still heightened risk through debt and high levels of sub-prime loans in this sector. Convincing investors starts with a move above $13.57 a share.