Ford Reports Earnings Miss, Anticipates Downtrend To Continue In The Near Term

Ford Motors (NYSE: F) released its second-quarter results and conducted a conference call with analysts on 25th July 2018. The company reported weak quarterly performance and missed analysts earnings estimates. EPS (Non-GAAP) was reported at $0.27, almost half of the reported figure of $0.56 in the same period last year. The company’s revenue was comparatively more stable at $38.90 billion, about 2% lower on a year-on-year (y-o-y) basis. Increased costs across regions coupled with poor performance in China dragged down the company’s overall results in the second quarter.

Ford’s biggest challenge for the quarter has been its performance in China. Although the country remains a prominent growth area for automobile sales, Ford has been struggling to increase its sales in this key market. Wholesale volumes in China for Ford were down by around 35% during the quarter and the company expects this declining trend to continue in the near term. Aging vehicle mix in a market of evolving new variants has kept sales volume low for Ford. Although Ford plans to introduce newer models to capture a larger market share in China, much of these fresher variants are expected to be available by the latter half of 2019.

Additionally, the company’s margins were weighed down by increased regulatory costs in Europe to comply with stringent emissions rules. A supplier fire at the company’s facilities at North American further cost the company around $600 million in lost production of higher margin vehicles. And most importantly, the recently imposed trade tariffs has resulted in a two-way cost headwind for the company in terms of exorbitantly higher metal prices in the U.S and retaliatory import tariffs imposed by Ford’s overseas markets (like China). Ford now projects $1.6 billion of commodity cost impact on its results for 2018, in comparison to an anticipated figure of about $1 billion at the beginning of the year.

Thus, Ford’s full-year performance outlook remains bleak largely as a result of significantly higher costs. Weaker performance in China and Europe is expected to drag profits lower, while its North American operations are expected to provide some relief. The company has additionally announced a new restructuring plan which is expected to result in a potential EBIT impact of around $11 billion (cash related impact of ~$7 billion) over the next three to five years. Based on the aforementioned weaker outlook, the company has consequently lowered it full-year 2018 EPS outlook by around 11% (assuming mid-points) and now expects it to range between $1.30 – $1.50 per share.

We have downgraded our base case estimate for the company based on the aforementioned developments. You can make changes to our assumptions to arrive at your own fair price estimate for the company by using our interactive dashboard: Ford’s Q2 2018 Results Imply A Downward Price Adjustment For The Company.