- The average EPS estimate from analysts is $0.47 which is almost double the EPS of Q3 2014.
- Europe and US markets continue to grow. Company will return to growth in Europe very soon.
- China is slowing down but the company is still holdings its own. An announcement of a big investment here would definitely have the potential to move the share price.
Ford Motor (NYSE:F) will announce its third quarter earnings on the 27th of this month and whilst I am optimistic about the growth in both, Ford earnings and revenue , I'm not so sure the share price will follow suit and rally accordingly. The company's share price is still down for the year despite the nice rally in October, on the back of very impressive results the company announced for the US market last month.
So why isn't the growth in sales that this company is experiencing is being backed up by share price strength? Well I wrote recently about Ford stock and I warned investors that there were explanations for Ford's share price being where it was. The US market may be strong now but recent economic data here has shown that a recession is a distinct possibility. Ford in Europe has been bleeding money since 2012 and the slowdown in China is not affecting the company that much because its footprint is not that large there compared to its competitors. Let's go through this article and discuss what I think could move the stock when earnings are announced and why the company needs to become more diversified and profitable outside the US.
Analysts Expect Substantial Growth
Firstly when you look at analysts expectations (see chart below), it is quite evident that the majority of them are expecting substantial growth both in EPS and revenue for Q3 and Q4 of this year.
Source: Yahoo Finance
Ford Stock May Not Rally After A Beat
What investors need to remember here is that if Ford announces a beat on the 27th, the share price may not rally accordingly. Why? Because Ford's success in the US has been a confirmed trend for many months now. Overall retail sales increased by 23% last month in the US which again may illustrate to many that this market is not about to slow down any time soon. Nevertheless when we look at the fundamentals, this company's overall revenues are still nowhere near its pre-recession levels (2007) when the stock traded for less than $10 a share. Therefore investors need to ignore US results as all US car manufacturers have been doing well due to low unemployment and low interest rates. Investors have to remain open to the fact that Ford's sales in the US would probably fall if interest rates rose or job growth slackened off which we are seeing signs of from recent economic data.
Since US growth or at the very least "stability" is priced in, investors will be looking to international markets for clues as to where Ford is going long term. The European market has been a hugely competitive market since the great recession and Ford has been doing all it can (through supply chain issues and new models, etc) to gain market share in the region. The region has done well, sales rose last year (for the first time in seven years) and furthermore sales are strong this year with sales in the region up 10%+ compared with the first 9 months of 2014. Therefore don't be surprised if the company announces its first profitable quarter in many years. In Q2, the company almost broke even and sales were up substantially again last month.
International Performance Is The Key
Many things are coming back on the track for Ford in Europe, such as the new SUV offerings which the company believes will increase its market share there. I just hope that the heavy investment the company has done in Europe will reward shareholders over the long term. This sector is extremely cyclical and can change on a whim. When you consider oil prices (which are historically low), cheap credit and government incentives and also the very low birth rate in Europe, the risks for Ford are high in the long term despite the current tailwind the company is currently enjoying there. However if the company in its earnings announcement can state clearly when the company will return to profitability in Europe, then this may boost investor confidence in the short term and shares may rally as a result.
The main themes that will rally the share price on the 27th will be forward looking statements from management. For example China going forward (Ford is still profitable there) could provide a significant boost to global sales going forward as the company doesn't have a big footprint there. Now would be an excellent time to start investing there as auto sales are definitely slowing down in the region. Personally I just think the east is where this company needs to be investing heavily and the best time to declare such an act would be in a downturn which China is current experiencing. If the company announces an aggressive plan for this region, astute investors would definitely move the share price as the company's revenues in the east pale in comparison to revenues from Europe and North America.
The takeaway here for me is that value investors will need to see growth-driven, forward looking commentary from management to invest more in this stock. Why? Well recent history has illustrated that Ford limits share buybacks so strong capital appreciation in its shares will not come from inside buying. Dividend investors will definitely be attracted to this stock as the company currently pays out almost a 4% dividend yield.
But it will be commentary from management that will dictate where the share price goes. We saw this recently with Walmart (NYSE:WMT) recently when it shares dropped by 12%+ due to announcing a poor outlook for its future earnings. Watch the growth plans from management (plus the expected EPS) but even if you buy on the 27th you still wont pocket the next dividend pay-out in December as the stock goes ex-dividend on the 28th of this month and you need to be holding the stock at least 3 days before.