Shares of Ford Motor Co. (F, Financial) sold off more than 6% after the open yesterday off the back of disappointing preliminary earnings figures.
Earnings came in at $1.30 per share, missing analyst expectations of $1.32. Given that management had forecast earnings in the $1.30 to $1.50 per share range during the previous quarter’s earnings call on Oct. 24, the fact the company just barely made its own quite recent estimate caused investors to be understandably concerned.
The venerable Detroit-based automaker has several challenges and possibilities facing it ahead of the release of its fourth-quarter and full-year earnings report, which is due after hours on Jan. 23.
Recent sales - cause for concern?
This earnings figure comes several weeks after the company reported its sales for December, in which it slightly outperformed mostly pessimistic analyst expectations - an 8.8% decline versus an expected decline of 9.5%, as forecast by Edmunds. The month as a whole was difficult for automakers, with the industry struggling in the face of rising interest rates and trade conflicts with China. Overall, Ford’s sales declined 3.5% over the entirety of 2018.
On the bright side, these slumping sales figures have been accompanied by a rise in margin within North America. On the third-quarter earnings call, Chief Financial Officer Bob Shanks told shareholders that:
“The details of our Automotive segment, which are shown on slide 9, highlight our performance in North America, where we generated a healthy EBIT of $2 billion, which is higher than a year ago despite lower volume and higher commodity costs. This was enabled by strongly positive mix, as our portfolio continues to shift more to trucks, utilities and vans. As a result, and as Jim mentioned, EBIT margin reached nearly 9%, which compares to an average first-half margin of 7.6%”
If there is a way forward for Ford, it lies through higher margins and increased average transaction prices.
Patience is a virtue
When Ford's preliminary earnings were released, CEO James Hackett asked investors to be patient with the company and wait for the results of an $11 billion restructuring initiative to come to fruition. This pivot has seen the automobile manufacturer move toward pickup trucks and SUVs and away from sedans, with Global Markets head Jim Farley saying that by 2023, 90% of the company’s product spending would be on trucks.
Passenger cars are a declining market in the U.S., and the company’s F-series pickup trucks have been the the biggest-selling model range in America for 36 years, so this restructuring makes sense - focus on what you are good at. What remains open to discussion is whether or not Ford is being aggressive enough in its transformation efforts. When compared to General Motors’ (GM, Financial) rapid and far-reaching effort ($6 billion in savings, 6,000 layoffs, five factories closed and six models discontinued), Ford looks anemic and sluggish. Add to that the fact Ford is restructuring its money-losing operations in Europe for the third time in a decade, and the picture does not look particularly promising. Patience may be a virtue, but indecision certainly is not.
Conclusion
This isn’t to say Ford cannot rebound and provide some good value for shareholders. The company has announced it intends to keep its dividend unchanged at 15 cents per share, providing a yield of 7.2% and making it an attractive buy from that point of view (although it could also be argued that money should be reinvested into the restructuring efforts). Regardless, it’s clear that investors are going to want to see concrete signs of improvement soon. Next week’s full earnings report and analyst call should go some way toward providing answers to a few very nagging questions.
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