Earnings Preview: Ford’s Bottom Line Could Decline This Year

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Ford Motor Company (NYSE: F) is set to report earnings for the first quarter of fiscal year 2017 on Thursday, April 27. The Detroit based auto maker enjoyed an excellent 2016 as it posted operating profits of $ 10.6 billion, one of the highest ever figures in its history. The company sold over 3 million units in North America for the second year running and grew its sales in China by nearly 14%. Moreover, the company recovered the top spot in the pick-up truck segment as inventories of F-series trucks recovered to full capacity at dealerships and expanded production in both the U.S. and China.

We expect Ford to have a strong 2017 as well, but its profits this year will most likely be lower than last year. There are three main reasons for this: 1) Ford will launch a new Superduty pick-up. This truck is manufactured using the newly installed equipment in Ford’s factories. According to U.S. accounting rules, the cost of equipment can only be expensed when sales are made. Unlike the previous version of this truck, costs associated with the equipment haven’t been expensed and thus will result in higher costs. These costs are likely to be offset by the higher prices of the new model but they will affect profits. 2) Given the new U.S. administration’s commitment to investing in infrastructure, the prices of some commodities have risen. One of these commodities is steel, which is an input material into most Ford vehicles. This will also affect the company’s profits. 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.

Worryingly for Ford, its sales have declined by 4.4% compared to last year’s in the first three months of 2017. While the F-series pick-up trucks continue to perform strongly, with sales up by 10% compared to the same period in 2016, some other Ford models, especially its sedans have had a terrible start to the year. Ford’s Focus and Fusion have seen their sales decline by 26.9% and 32.3% respectively so far. In contrast, its luxury brand Lincoln has seen its sales grow by 8.7%. Since pick-up truck sales and luxury sales are far more profitable than sedan sales, the net impact of these numbers on Ford’s bottom line is likely to be positive. Still, we expect the company’s overall profitability to decline.

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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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