Ford 3Q Earnings
Ford Motors (NYSE: F) reported its third-quarter results after the market closed on October 24 and has seen a surge in its stock price the day after. Having generated $678 million in earnings before tax in this quarter, the best in the last 7 quarters, Ford’s higher-than-expected earnings has boosted investor confidence. The automotive revenues exceeded the market expectations and came in at $34.60 billion as compared to an expected $33.5 billion last year. The company posted total revenues of $37.6 billion and adjusted EPS of $0.29 as compared to the market expectation of $0.28. Strong sales of pickup trucks in North America helped offset the declining sales volume of passenger cars, higher raw material costs, and lower volumes in China and Europe.
Ford’s stock has surged 10% following the results and is now trading at $9 per share. We have a $10 price estimate for the company, which is above the current market price. View our interactive dashboard – Our Outlook For Ford in 2018 – and modify the key assumptions to arrive at your own price estimate for the company.
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Key Highlights From Q3
The company’s revenue was up 3% as compared to the year ago quarter. However, the company’s adjusted EBIT and net income both declined due to trade and tariff challenges in China. Ford’s cumulative 9-month sales in China stood at 585,171 units, which is down by almost 30% y-o-y. The company posted a decline in its EBIT margin in the South American region due to volume decline in Argentina and weaker currencies of South America as compared to the US. Further, the company witnessed weak margins in the Asia-Pacific region due to lower volume and net pricing in China’s JV and unfavorable market factors in China for Explorer and Lincoln imports. Lastly, the European margins also dropped due to a large volume decline in Turkey, weakness in Turkey and Russia, with new launching costs.
In North-America, the company delivered an 8.8% EBIT margin, supported by more than $1 billion of improved mix and continued consumer shift towards sports utility vehicles and trucks. Ford’s F-series pickup trucks gained a significant market share and the Super Duty line of trucks witnessed record high transaction prices. The shift towards trucks and high-end vehicles is likely to be a key driver of Ford’s profitability in the near term.
However, outside of North-America, the company is still facing challenging issues and has lost substantial market share in these regions.Revenues were slightly up in Europe, which can be credited to the rise in share for the commercial vehicle. The company experienced a record quarter in this region for commercial sales as Europe is gearing towards commercial vehicle success. However, with the unexpected deterioration in its Europe and China’s business, the company would not be able to achieve its previously announced 8% margin or high-teens ROIC targets by 2020 in these markets.
FY’18 Outlook
The company has reaffirmed its adjusted EPS guidance of $1.30-$1.50 that was lowered in the second quarter. The lower guidance was primarily due to a rise in commodity costs and the tariffs’ impact on raw materials. Ford now projects $1.6 billion of commodity cost impacts on its 2018 results, notably higher compared to the guidance of around $1 billion at the start of the year.
The company’s balance sheet remains strong with $23.7 billion in cash and $34.7 billion of total cash liquidity. However, the company recently announced that it will spend $11 billion on restructuring. As a part of this restructuring program, the company plans to trim around 70,000 salaried personnel by Q2’19. The lack of detail on its restructuring plans had already taken a toll on the stock price in the last few days. Further, there were limited details in the latest earnings call, which could further create anxiety among investors.
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