Modest Outlook for Ford

Company reports weak 2016 earnings compared to prior year

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Jan 26, 2017
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Ford Motor Co. (

F, Financial) reported net income of $4.6 billion and earnings per share of $1.15 for full-year 2016 on Jan. 26. The above values underperformed comparative values for full-year 2015. Although the company’s profits met expectations, Ford has a modest financial outlook for 2017 relative to its competitors.

Brief summary of earnings report

For fourth-quarter 2016, Ford reported a net loss of $800 million, a decrease of $2.7 billion from the prior-year quarter. Revenues declined $1.6 billion while adjusted pretax profits dropped $500 million.

The Michigan auto manufacturing company operates in two business segments: Automotive and Financing. The Automotive segment had satisfactory performance for full-year 2016 with wholesales increasing about 16,000 and revenues increasing $900 million. High increases in Asia Pacific wholesales more than offset the decreases in wholesales for the North America, South America and Middle East regions.

Although Ford’s Automotive segment had strong full-year 2016 operating margins in North America and Europe, the company expects these margins to decline in 2017 due to “unfavorable volume” in North America and higher Fiesta and EcoSport costs in Europe. The expected decline in segment operating margins further weakens Ford’s overall operating margin, which has declined since 2014.

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Company has modest financial outlook relative to peers

Due to declining operating margins yet high returns on equity, Ford’s profitability ranks a modest 6 out of 10 as of Jan. 26. The company’s operating margin, return on assets and Greenblatt return on capital underperform more than half of global auto manufacturers.

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Ford has the lowest financial strength rank among three of its major competitors: General Motors Co. (

GM, Financial), Honda Motor Co. Ltd. (HMC, Financial)(TSE:7267, Financial) and Fiat Chrysler Automobiles NV (FCAU, Financial). This suggests that Ford’s financial outlook is relatively poor. Figure 1 compares the four companies’ financial strength and profitability rank while Figure 2 compares the companies’ debt-equity ratio and return on equity.

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Figure 1

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Figure 2

Ford’s debt-equity ratio of 4.36 is significantly higher than its three competitors, implying volatile earnings and the potential for high debt burden. Although the company has a strong Piotroski F-score of 7, its Altman Z-score and cash-debt ratio suggest moderate financial distress.

Conclusions and further comments

Ford’s stock price declined about 3.21% from its closing price Jan. 25, which was near a three-week high of $12.79 per share. Despite the poor outlook, Ford’s price-earnings (P/E) ratio and price-book (P/B) ratio are near 10-year lows. The company’s dividend yield of 4.84% is near a 10-year high, outperforming 92% of global auto manufacturers.

John Linehan of the

T Rowe Price Equity Income Fund (Trades, Portfolio) purchased 4.85 million shares during fourth-quarter 2016 as the company has cheap valuations and pays above-average dividends. Ford’s share price averaged $12.13 during the quarter.

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A previous article discussed Linehan’s seven stock buys during fourth-quarter 2016.

Disclosure: I do not have positions in the stocks mentioned.

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