Ford Falls on Outlook: Will Headwinds Make It Fall More?

Ford (F) released its third-quarter results after the market closed on Wednesday. The company reported an EPS of $0.34, which was higher than analysts’ expectations of $0.26. Ford’s automotive revenues of $33.93 billion also beat analysts’ estimates by $50 million. However, Ford stock fell 2.5% in after-hours trading. The company lowered its fiscal guidance. Ford stock was trading 5% lower at 9:55 AM ET today. In contrast, Tesla (TSLA) provided a strong third-quarter earnings release. The company had a positive quarter. Due to higher earnings and faster ramp-up expectations, Tesla stock was trading 17.3% higher at 9:55 AM ET.

Ford’s outlook impacted its stock

Now, Ford expects its adjusted EBIT to be $6.5 billion–$7.0 billion. The previous range was higher at $7.0 billion–$7.5 billion. At the midpoint, the guidance is even lower than Ford’s actual EBIT of $7.0 billion in 2018. In line with the lower EBIT, the company’s adjusted EPS will likely be $1.2–$1.32 compared to $1.2–1.35 previously.

Weaker fourth-quarter outlook 

Ford attributed the weaker outlook to more headwinds, including higher warranty costs, higher incentives in North America, and lower volumes in China. During the company’s earnings call, CEO James Hackett said, “We are experiencing more headwinds than expected in our fourth quarter.”

Higher incentives in North America 

The company has to contend with higher incentives in North America to overcome the competitive environment—especially in the SUV and truck segments. During the call, Ford’s automotive president, Joe Hinrichs, mentioned three vehicles that accounted for larger incentives. The vehicles are the Ranger pickup, F-150, and Edge crossover.

Ford is losing market share in China

The company’s China sales fell 30.3% YoY during the third quarter. The sales in the first nine months fell 29.2%. General Motors’ China sales fell 17.5% YoY during the third quarter. Auto companies’ disappointing performance in China isn’t a surprise. China’s auto sales have fallen for 15 out of the last 16 months. To learn more, read China’s Auto Market Slowdown Deepens-Ford, GM Reel. In line with the decline in deliveries and lower component volume, the company’s China revenues also fell 27% YoY. Ford’s market share in the country fell from 2.9% in the third quarter of 2018 to 2.3% in the third quarter. The company is launching many new models in China. As a result, Ford expects a positive turnaround.

North America profit

In North America, Ford is replacing 75% of its product lineup volume by 2020. The company will refresh and expand its SUV and truck portfolio in contrast to sedans. SUVs and trucks have remained a lucrative segment in the overall decelerating US auto market. The competition in the space is heating up between Ford, General Motors (GM), and Fiat Chrysler (FCAU). Read F, GM, FCAU: Who’s Winning the US Truck Sales Race? to learn more.

Ford’s revenues in North America increased 5% due to an improved sales mix and higher net pricing. As we discussed in Ford’s US Sales Drop 4.9% YoY, Stock in the Red, the company’s volumes fell 4.9% in the US. Meanwhile, the company’s market share in North America fell 12.6% in the third quarter compared to 13.3% in the third quarter of 2018.

Restructuring efforts

Among the total restructuring costs of $11 billion, Ford expects $1.0 billion–$1.5 billion in 2019. So far, $0.7 billion has already occurred this year. The restructuring plan is very ambitious. The plan should run through 2023. Ford is reallocating its capital to high-return segments and leveraging its partnerships globally. Restructuring could benefit the business in the long term. However, the restructuring will depress the company’s cash metrics in the short to medium term.

Moody’s downgraded the company to junk status in September due to its restructuring plan and operating weaknesses. The downgrade and Ford’s expensive programs increased markets’ concerns regarding whether Ford can sustain its dividend. Read Should Ford Investors Brace for a Dividend Cut? to learn more.

Ford’s ramp-up issues 

Recently, Bloomberg reported that the company’s new Explorer SUV launch didn’t go as planned. Some of the models needed repairs before they could be sold. During the earnings call, Joseph Hinrichs, Ford’s Automotive president, discussed the launch. He said, “We are disappointed in our overall performance in the ramp-up of the volume.” He also said, “We signed up for too much at launch.”

Launch issues, higher incentives, weaker sales in China, increased competition, and Ford’s expensive restructuring program taking a toll on the company. The company needs to show rising profitability in its SUV and truck segments in the US and China to regain investors’ trust.