Earnings Review: Ford’s 2016 Numbers Are Impressive But They Need To Be Put Into Context
Ford Motor Company (NYSE: F) reported earnings for the fourth quarter and full year of fiscal year 2016 on Thursday, January 26th. The U.S. auto maker reported earnings per share of $1.15 for the full year, a decline of 61 cents compared to 2015’s earnings per share. In comparison to the previous year, this was a much lower figure but in historical terms this was one of Ford’s best ever performances. There were a number of bright spots for the company in the earnings numbers highlighting the strength of the company’s business but there were also signs that profitability has peaked and these numbers will most likely not be repeated in 2017.
The U.S. auto maker saw its gross margin decline by 140 basis points as overall revenue grew by only 1.5% compared to gross expenses, which grew by 3.1%. The Automotive gross margin declined by 120 basis points, while automotive operating margin declined by 230 basis points as selling, general and administrative expenses grew by over 20% in 2016. To be sure, these numbers are still extremely impressive historically but compared to other auto companies they show the weakness in Ford’s business. The company’s regional performance shows these differences even more clearly.
Ford sold 6.65 million new vehicles in the fiscal year 2016, close to 50% of which were sold in North America. Despite only contributing to 50% of overall sales, North America contributed close to 95% of the company’s pre-tax profit. While the company’s operating margin in North America was close to 10%, its overall pre-tax profit margin was only close to 6.7%. This suggests that the company’s sales mix outside of North America needs to change. We have written in the past about how Ford should expect to make lower profit in North America in 2017. This makes it even more necessary for Ford’s model mix outside the U.S., especially in China, to have a higher proportion of SUVs, Crossovers and pick-up trucks. Additionally, the company needs to make sure it comes good on its plans to raise the sales of its premium brand Lincoln’s annual sales to 300,000 by 2020. We have written previously about how much this could add to the company’s valuation. Also, we just wrote about how the company’s financial division should expect to make lower profits going forward, making this year’s relative decline compared to 2015 less impressive.
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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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