Earnings Preview: Ford’s Fundamentals Should Stay Strong But Lower Profit Expected On One Time Items
Ford Motor Company (NYSE: F) is set to report results for the third quarter of fiscal year 2016 on Thursday, October 27th. In the previous quarter, the Detroit based auto maker posted an extremely strong set of results but suffered from tough year-on-year comparisons. In the first half of the year, the company reported pre-tax profits worth $ 6.8 billion and had guided for full year revenue of $10.8 billion.
Ford typically reports higher profits in the first half of the year as new vehicle launch related costs weigh down profits in the second half of the year despite commanding higher transaction prices. In 2016, however, the company’s profitability in the second half of the year is expected to be even lower. There are three reasons behind this:
- The company recalled over 2.4 million vehicles due to defective door latches in some of its models.
- The launch the 2017 version of its Super Duty Pick-up truck will result in higher costs for the company. This is as the truck will be made using new machinery that the company had previously capitalized (i.e. recorded as assets) and will expense over the next few years. We have written about this in more detail previously.
- The impact of the E.U. referendum in the United Kingdom has had a strong impact on the Pound Sterling and the Euro. Even though Ford is hedged against the impact of the vote for the year 2016, it could lose money on sales made in these areas as these currencies translate into lower dollar revenues. The impact could be more pronounced in the coming years.
These are all one time events and are not related to the core of the business, which continues to remain strong. Ford has regained its top position in the pick-up truck market in the U.S. auto market and its sales in the SUV segment also continue to remain strong, with two of the five highest selling vehicles in this segment belonging to Ford.
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Additionally, Ford continues to do well in China, the world’s biggest auto market. The company experienced a significant sales bump in the July-September quarter with the launch of the Ford Escape SUV. The new Ford Kuga is also expected to have a similar effect. Moreover, China’s commercial vehicles market is beginning to look up and Ford is a global leader in this segment. (Read: How Much Can China Success Add To Ford’s Bottom Line)
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Ford Motor
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