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Why Analysts Expect Ford’s Profitability to Disappoint in Q3 2018

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The existing trend in Ford profitability

In the second quarter, Ford Motor Company (F) reported automotive segment EBIT (earnings before interest and taxes) of $1.7 billion, down 52% YoY (year-over-year). Its automotive EBIT margins fell to 3.2% in the second quarter compared to 6.5% in the second quarter of 2017.

Lower sales volume, higher commodities prices, and Takata airbag settlement costs were some of the key negative factors responsible for Ford’s worsening automotive profits. Increased commodities prices, especially steel and aluminum, took ~$280 million from its EBIT, while the rise in other material costs (excluding commodities) took $254 million.

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Estimates for Ford’s Q3 profit margins

Wall Street analysts are estimating Ford’s third-quarter adjusted pre-tax profit margin to be 3.9% this year. That was much worse than 5.8% in the third quarter of 2017.

Analysts also estimate that Ford will post an adjusted net profit margin of 3.5% in the third quarter, which is lower than 5.1% in the third quarter of 2017.

What could affect its margins?

In the third quarter, Ford’s US truck and overall retail sales were weak YoY. In September alone, sales to retail customers fell 12.6%, and truck sales fell 9.9% YoY.

A lower contribution of trucks and retail sales in Ford’s total US sales could act as a negative factor for its profit margins in the third quarter. That’s because trucks and retail sales tend to yield higher profitability than cars and fleet sales. On the negative side, continued currency headwinds, tough competition in China, and high raw material costs could pressure Ford’s third-quarter profits.

In the last few years, automakers (IYK), including Ford, General Motors (GM), Toyota (TM), and Fiat Chrysler (FCAU), have benefited from strength in US light truck demand. In the quarter ended June 30, Ford, FCAU, GM, and TM reported adjusted net profit margins of 3.1%, 3.4%, 7.1%, and 8.9%, respectively.

In the next part, we’ll explore the possible highlights of Ford’s third-quarter earnings event.

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