Turnaround Letter Buy-rated Ford Motor Company (F) reported results that were flat/slightly better than last year’s 2nd quarter. Their outlook for the 3rd quarter and full-year profits suggests similarly flattish/slightly better results, which is below expectations for more meaningful improvements. Although Ford is making progress with its redesign and new vehicle and other initiatives, the progress is much slower than the market was hoping for – which pressured Ford’s stock post-earnings. We continue to like Ford shares, but admit to some disappointment in the pace of improvements under CEO Jim Hackett, who joined in May 2017 to re-engineer the company. We remain patient, waiting for the recovery while we collect the generous 6%+ dividend.
The Automotive segment is a tale of two worlds.
North America is humming along nicely. This region produces about 70% of total Automotive revenues and more than 100% of the profits. Increasingly tilted toward trucks and SUVs, the region continues to see strong pricing (the average F-Series truck now sells for $47,400) and profit margins (7.1%), although the market share and earnings ticked slightly lower in the second quarter.
Outside of North America, Ford continues to struggle. Chinese operations (only 2.5% of total Automotive revenues) are showing smaller losses at $155 million, compared to losses of $483 million a year ago. However, non-North American operations remains strategically and operationally impaired. We like the quick progress in China under new chief Anning Chen, but we are unclear whether that market is worth the effort. Ford has a tiny 2.3% China market share (down from close to 5% only a few years ago), the market is vastly over-capacity and domestic competitors are increasingly able to edge out non-domestic firms.
Europe turned a modest $53 million profit, a reversal from the $73 million loss a year ago. Ford’s new partnership with Volkswagen is encouraging, and the focus on commercial trucks seems logical, but as with its China business we wonder if its long-term prospects are worth all the capital and management attention it consumes.
Elsewhere, Ford’s operations in Latin America, Asia ex-China, and Africa/Middle East remain marginal revenue contributors but noticeable loss-producers (loss of $220 million in the 2nd quarter). While we understand why this group is at the bottom of the turnaround priority list, the large and chronic losses require a lot more attention, which is already stretched fairly thinly at Ford.
Ford Credit is exceptionally healthy. Pre-tax profits of $831 million (half of Ford’s overall adjusted operating profits) were 29% higher than a year ago. Flat core profits were supplemented by higher residual values on leased cars and by the effect of lower interest rates on its derivative portfolio. Its capital position, liquidity, and credit metrics remain sturdy. We are watchful as this profit engine depends on the credit-worthiness of buyers of expensive trucks, which can weaken if job losses turn upward.
We continue to like Ford shares, but admit to some disappointment in the pace of improvements under CEO Jim Hackett, who joined in May 2017 to re-engineer the company. We remain patient, waiting for the recovery while we collect the generous 6%+ dividend.
We continue to rate Ford Motor Company (F) shares a buy with a $20 price target
Disclosure Note: One or more employees of the Publisher own F shares.