Three Reasons For Ford’s Lower Profit Guidance For 2017

Ford Motor Company (NYSE: F) has issued guidance that earnings per share for the first quarter of 2017 could drop from 68 cents (excluding one-time items) in 2016 to somewhere between 30 and 35 cents. For the full year, the company expects operating profit to drop from $ 10.4 billion in 2016 to around $ 9 billion. This is likely to happen for the following three reasons:

1. The major reason for this are the costs associated with the launch of Ford’s new Superduty truck. The 2017 version of Ford’s truck was developed in factories that were retooled for the production of trucks with an aluminum body instead of the usual steel body. According to U.S. GAAP rules, costs associated with manufacturing can only be expensed when the sales are made. This means that since new tooling and machinery was developed, Ford will capitalize the costs related to building those items, i.e. they add them to their assets. The cost of building these assets will slowly be expensed over the life time of the product as depreciation and amortization. Since these costs were already paid off for the outgoing older model, sales were more profitable. However, the costs of building the new tooling and machinery for the Super Duty truck will be expensed in small installments from the transaction price Ford can command for the new version of these trucks.
2. The company has pointed out that it expects an increase in price of some commodities such as steel to impact its bottom line. Given the impending expectation of a new infrastructure bill, prices for steel are expected to rise since demand will also rise. Ford also expects negative currency fluctuations to impact its bottom line.
3. Ford has a sizeable business in Europe. Unlike GM, Ford intends to continue operating in the region, including in troubled regions such as Russia. However, the impact of Brexit and general weakness of the economic situation in the region means that the company could lose money again in the region.

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