- Ford stock lost 8% on missed estimates and uncertain guidance achievement for FY16.
- Sales are still strong, but margins are getting hit by discounts and incentives.
- Forecast for U.S. auto sales is below the recent high of 18 million, but shows stability.
Ford Motor's (NYSE:F) shares snapped their upward trend that started in early February this year to drop 8% after the Detroit-based automaker missed analyst estimates. As if the earnings miss was not enough, Ford said that the company sees risks in achieving guidance. An earnings miss coupled with a pessimistic view of the future is one of the best recipes to push share price downward, and that’s exactly what Ford got after announcing its Q2 earnings.
Ford reported earnings per share of $0.52, well short of analyst expectation of $0.60 per share. Total revenue during the quarter went up by 6% to $39.5 billion from $37.3 billion last year. Ford’s Automotive revenue went up by 5.2% during the quarter, but pre-tax profits dropped by 12.5%. With North America accounting for nearly 64.5% of revenues during the quarter, Ford’s performance was directly tied to its fortunes in this region. That’s something I covered in detail in my preview of earnings titled Will Great be Good Enough for Ford in Q2?
On the sales front, Ford has had a stellar 2016 so far, with sales jumping 5% during the first half of the year. But GM General Motors (NYSE:GM) upped the ante and started offering heavy incentives, forcing Ford to follow the same route to attract buyers. In part, that resulted in operating profit margin for North America dropping from 12.2% last year to 11.3% this year.
Ford also noted the slowdown in the U.S. market as the reason for increasing incentives and lower profit margins - as well as the most likely reason for Ford seeing risks in achieving its fiscal 2016 guidance.
“The U.S. auto market slowed sooner than Ford anticipated, Chief Financial Officer Bob Shanks said. The automaker now sees U.S. auto sales of 17.4 million to 17.9 million vehicles, down from an earlier forecast of about 18 million. Excluding medium and heavy trucks, the new projection translates to a light-vehicle market of 17.1 million to 17.6 million, compared with last year’s record 17.5 million.
“We do think the U.S. is coming down from what we expected,” Shanks said. “We saw higher U.S. incentives -- that was for the industry and for us. The industry increased and we increased in line with the industry.” - Bloomberg
In a way, it is good to that Ford still expects the U.S. market to stay above the 17 million level. But with auto sales staying below the peak levels achieved earlier, the fight with GM and other car makers will start to heat up even more. The effect of discounts is already pinching Ford’s bottom line, and this region is going to be under pressure for the rest of the year as U.S. auto sales stay within that tight 17.4 to 17.9 million range.
Moreover, with most of its revenue and profits coming from this region, it is easy to see why Ford sees risks in achieving its FY16 targets. It must be noted that the company did not revise its guidance downwards - they just wanted to price all the bad news now instead of moving them to the latter part of the year.
Mark Fields - President, Chief Executive Officer & Director, Q2 Earnings call:
“Our risks are around lower pricing and higher incentives than we expected in the U.S. and China. A softer although still strong U.S. retail industry, the effects of Brexit on our operations in Europe, a more difficult external environment across many of our markets in Middle East and Africa, a weaker Chinese RMB and lower than expected auction values for smaller vehicles leased in the U.S.”
Ford’s Europe situation is steadily improving, and the company tripled its pre-tax profit in the region, which is great news for the long term. But in the short term we still need to keep all eyes on their North America numbers.