The performance of Ford (F, Financial) in the first quarter of its fiscal year was relatively mixed. Revenue increased by 7% versus the same quarter of the previous year, reaching $42 billion. Higher costs for key commodities and adverse exchange rate movements, however, meant that adjusted Ebit was down by 12% to $2.2 billion.
Looking ahead, the company maintained its guidance for the full year. It expects higher commodity prices to weigh on its performance in North America, although market factors and new product releases are due to lead to improved performance in South America and Europe.
Improving outlook?
While the S&P 500 has risen by around 13% in the last year, Ford’s stock price is down 2%. The company’s valuation is also little changed since its results release, which suggests that it was unable to have a significant impact on investor sentiment.
But the prospects for the company’s financial outlook could improve due to a strategy shift. Notably, the company recently announced that it will move away from selling traditional sedans in the U.S. market. The company continues to record stronger performance from its newer and higher-margin products, which are focused on the SUV, crossover and pick-up truck segments.
For example, sales of its F-series trucks increased by 11.3% in May despite supply disruption, while deliveries of the Lincoln Navigator SUV increased by over 100% versus the previous year. A focus on its most popular vehicles could help to arrest the decline in U.S. deliveries of 3.3% that was recorded in the first four months of 2018.
Ford is also seeking to become a more innovative company. It is intending to adapt to changing consumer preferences by offering 40 hybrid and electric vehicles in its product lineup by 2022. It will also continue to invest in autonomous vehicles and its mobility division.
While this is a drain on cash at the moment (it recorded a $102 million loss in the last quarter), the prospects for growth in both areas in the long run could be significant. And with the potential to become a cloud-based data provider through the Transportation Mobility Cloud, the company looks set to diversify its income streams. This could catalyze its overall performance and its stock price in the long run.
Although Ford’s performance in the U.S. has disappointed so far this year, the wider industry saw a rise in new-vehicle sales of 4.7% in May. This helped the company to generate a 0.7% increase in deliveries for the month, with retail sales of 3.5% being aided by the potential for rising interest rates.
Indeed, while the outlook for the automotive industry in the U.S. may be relatively downbeat, it appears as though consumers are responding to forecast rises in interest rates by purchasing cars now, rather than in the medium term. This could continue to provide a positive catalyst for sales growth, with interest rates set to rise by 100 basis points by 2020.
Uncertain future?
However, Ford continues to experience significant disappointment in China. In May, for example, its sales declined by 29% versus May 2017 despite the fact that sales of new vehicles in the country increased by 7.9% year-over-year. For example, the company’s best-selling vehicle in China in 2017, the Ford Escort, saw its sales fall by 37% in May, while its second best-selling vehicle, the Focus, recorded a 50% decline in sales in May.
Ford’s downward sales trend in China started in 2016 and is showing little sign of slowing down in the near term. Buthe company will seek to turn around its performance in the country over the long run. It expects to launch up to 50 new vehicles in China over the next seven years, as it seeks to grow revenue there by 50% by 2025.
With the Chinese market expected to be 50% bigger than the U.S. market this year at over 25 million units, the growth potential for SUVs, crossovers and luxury vehicles is high. With Ford set to focus on those areas, it could deliver turnaround potential. China has the scope to be a catalyst on its financial performance.
Verdict
While the performance of Ford from a financial and investment perspective has been relatively disappointing, the company seems to have several potential catalysts that could create an improved outlook. Its plans to move away from sedans and focus on SUVs, crossovers and trucks in the U.S. market could lead to stronger performance. Similarly, its sales may be boosted by the potential for future interest rate rises, while a focus on autonomous vehicles, hybrids and further innovation could create additional growth potential.
Additionally, while its performance in China has disappointed in recent years, its turnaround plans could provide a growth opportunity in the long run. As a result, with it underperforming the S&P 500 in the last year, Ford could offer a value investing opportunity.
