Ford Motor (F, Financial) reported strong third-quarter results with impressive performance in North America. The earnings justify the automaker's bold decision of introducing the aluminum pickup model.
Ford expects this to continue to have a positive impact on its financials over the coming few quarters. Despite Ford’s stunning performance, company shares trended lower by as much as 5%. Let’s take a look at the second-largest American automaker’s quarterly results and analyze why its shares tumbled following the earnings announcement.
The quarter that went by
Ford generated revenue of $35.8 billion during the third quarter, up 9% from last year, by selling nearly 1.6 million vehicles across the globe. Analysts had expected the top line to come in around $35.5 billion. The automaker’s global market share inched up by one-third of a point compared with last year.
Ford’s net income more than doubled to $1.9 billion earnings, which translates to 45 cents a share compared with average analyst estimates of 47 cents. Last year in the same period, the company had recorded a profit of $835 million. It is the earnings miss that impacted company shares that went down 79 cents to $14.89. This is the steepest fall the automaker has seen in more than a year.
Ford Chief Financial Officer Bob Shanks entirely blames the “tax rate difference” for the earnings miss. He said, “We came right on in terms of operating results, but we had a 33% tax rate. The analysts on average had a 32% tax rate.” The company’s average tax rate was 21% a year earlier.
Ford saw strong sales for its aluminum-bodied F-150 pickup, which helped it to register record pretax income in North America. Ford made $2.7 billion from its North American market, which is up 89% from a year earlier. However this wasn’t enough to nullify the impact of the earnings miss on the company’s shares.
The quarter that follows
Apart from the earnings expectation, investors reacted to Shanks and Chief Executive Officer Mark Fields’ announcement regarding their expectations of the fourth quarter. The last quarter of the fiscal year would not be as profitable owing to increased advertising expenses, lower productivity and the contract with the United Auto Workers.
Joseph Spak of RBC Capital Markets said, “There may not be as much upside as hoped for in fourth quarter 2015.” He expects the company’s North American operating margin to reduce to 8.5% in the last quarter of the fiscal year compared with 11.3% recorded in the third quarter. This shall raise doubts regarding the sustainability of Ford’s North American profitability margins into 2016.
2016 F-150, Picture from Company Website
Pickup truck to continue driving growth
Ford’s third quarter results are largely a reflection of the company’s top seller, the F-150. The pickup is the bread-and-butter model for the Blue Oval. It was launched last fall. However, it was only in June that the model achieved full production at the Kansas and Dearborn factories. The F-Series pickups sales, including the F-150’s larger siblings, saw a nine-year high in the July-September period. Ford delivered 207,271 F-Series trucks in the U.S, which calculates to selling 85 trucks an hour.
Not only were volumes high, prices were, too. Customers are ready to pay more for the 700 pounds lighter aluminum pickup. Shanks declared that the F-Series truck brought an average of $2,000 more into the company’s revenue tank in comparison to last year.
Ford’s crosstown rival, General Motors (GM, Financial), also saw strong pretax profit of $3.3 billion in North America on account of massive truck and SUV sales.
Ford expects truck sales to keep going strong. Fields expects that demand would be motivated by attractive interest rates, improving employment numbers and other favorable factors. The automaker proposes to introduce its new aluminum Super Duty trucks in 2016, which should further bolster truck volumes. Replacement demand should also increase as many buyers are expected to substitute their aging trucks. One out of four trucks in the U.S. is estimated to be at least 20 years old.
Performance in international market
Ford’s sales improved 17% in Europe but dropped in South America, the Middle East and the Asian market. The Asian slump was largely on account of the sluggish Chinese economy, which has been a major volume driver for Ford in recent times. However, the company managed to earn $20 million in profit from Asia, though there were production cuts in China. The company remains optimistic on its prospects in China. Shanks said, “We still see growth. It may be a bit slower than it has been.”
Last word
Ford remains on track to deliver a “breakthrough” year that it assured after recording dissatisfactory results last year. The company’s operating profit of $7 billion through September is already 10% more than the total profit it earned in 2014. Shanks believes the company is poised for growth and should report strong results over the coming years.
