- In Q1 2016 Ford reported strong growth across the board on most metrics.
- Despite the success, investors remained skeptical about sustainability.
- Second quarter earnings will be an acid test of sorts for the Detroit carmaker.
Ford Motor (NYSE:F) will be reporting its second quarter 2016 results on July 28, 2016. Though there has been good news coming thick and fast from the Detroit automaker (such as Europe returning to profitability, market share rising in the United States and Europe and things picking up speed in China), the stock has barely moved in the last year thanks to a “the auto Industry has peaked and it has to go down now” theory making the rounds.
Ford reported its best quarterly results during Q1-2016 in the 113-year history of the company with record pre-tax profits of $3.8 billion and a net income of $2.5 billion, squarely beating all analyst estimates. But, investors rewarded such stellar results with a mere 43 cent increase - or 3.1% hike - in the stock price on the day of the announcement.
Sadly, it will be hard to imagine the stock performing a high jump even if Ford comes in with better than expected results during the second quarter. The entire auto industry has been beaten down badly in the last year, with all the top five automakers around the world showing negative returns since the start of the year - except for Ford, with about a 2.7% rise. It’s clear that, until now, auto stocks have been moving up or down depending on macroeconomic factors and auto sales trends prevalent in their home countries.
Some Metrics to Look At
Ford’s global market share went up by one-fifth of a percentage point from a year ago, thanks to some stellar sales numbers in the United States, Europe and APAC. If it ends up doing better this quarter then it will validate Ford’s claim that the company is on a steady rising path around the world and not just in their domestic market.
How Ford performs in Europe will be key to the company’s future, especially the upcoming quarterly results and for the rest of year as BREXIT will start to impact operations in the region. Their market share here had improved from 7.3% in 2013 to 7.7% in the first quarter of 2015 to 8% during the first quarter of this year; and if they can improve or hold onto those levels, that’s going to be great news for investors.
Pre-tax profits in the region have also been positive for the last two quarters. Finally, after years of restructuring their Europe operations, Ford has started to reap the benefits. In FY 2015, Ford registered $259 million in pre-tax profits compared to $598 million losses in the year before. They further improved their position by recording a solid $434 million in pre-tax profits in the region during Q1-2016. With the company guiding better than last year’s performance in Europe for 2016, it will be targeting to stay in the profit zone during the second quarter as well.
Quoting Robert L. Shanks - Chief Financial Officer & Executive Vice President from the Q1-16 Earnings Call:
“I think we're going to have a great year in Europe. And as we said, even though we are off to a very good start and I think we're going to continue to have a very good year, our objective is to make Europe a very sustainable and vibrant, profitable part of our business and achieving 6% to 8% operating margin.”
In 2015, every business division except for South America and MEA were profitable, and Ford will be very intent on keeping it that way. However, with the lion's share of its bottom line profit coming from United States, their pre-tax results from the domestic market will be extremely important for short-term stock movement.
Auto sales in the U.S. haven’t fallen off the cliff, as predicted by many auto-industry analysts. With auto sales remaining above the 16 million range through the first half of the year, I do not expect nasty surprises for the rest of the year.
Conclusion: The Problem with Good Performance
Consensus earnings estimates for Q2-2016 are at $0.6 on the back of $36.31 billion in revenue.
With Ford’s U.S. auto sales during the first half of 2016 increasing by 5 percent to 1.353 million vehicles with able help from truck sales, Ford should be able to post solid results for the quarter.
The real problem is that, even if Ford beats estimates, that may still not give the stock enough of an upward momentum. The entire auto segment still seems to be surrounded by strong negative investor sentiment. That, more than anything, will decide which way Ford stock will move post the earnings.