What Ford’s Earnings Report Says About The Economy

Investors who expected huge profits from the Ford (NYSE: F) earnings report were sorely disappointed when the company released results yesterday.
The positive news from Ford was its optimistic outlook for 2015, with the CEO calling it a “breakthrough year.” On the other hand, if you were expecting the Ford earnings report to indicate that the company’s long-term corporate restructuring is starting to pay off, you were probably quite pleased.
Ford is a bellwether for the U.S. economy, and the company’s financial results shed light on the economic health. The company’s guidance and commentary often serve as leading indicators and can help us look months ahead. I look to Ford’s earnings release and its accompanying management commentary for insight into the American consumer, the U.S. economy and how they are impacted by cheap oil.
What I read and heard explains why Ford’s stock rose nearly 3% after releasing financial results.. Ford’s numbers themselves weren’t stellar, though they did slightly exceed analyst expectations.
Graphic 1 1.29.15 Ford results after-tax highlight copy
For the first quarter, Ford reported net income of just $52 million. That was a 98% decline from the $3 billion in profits in the fourth quarter of last year. But this headline number is rather misleading.
That’s because earnings in both the fourth quarter of 2014 and 2013 were affected by one-time charges. For example, last quarter profits were negatively impacted  by $1.2 billion in one-time charges, largely related to restructuring of the company’s Venezuelan operations. Yet in the fourth quarter of 2013, profits were positively impacted by a one-time $2.1 billion tax credit.  The reality of the net income picture becomes clearer when you consider these one-time charges.
The one-time expenses and tax credits make comparison complicated. But it becomes simple if we simply compare the pre-tax earnings for both quarters.
Graphic 2 1.29.15 Ford results pre-tax highlight
Now that we can compare the two quarters on an apples-to-apples basis we can see that in 2014 Q4 pre-tax income declined 15% year-over-year. Revenue for the quarter fell 4.5% year-over-year.
So why did the stock rise nearly 3% after the Ford earnings release? The answer is largely the health of the American economy and the positive impact of cheap oil.
Though earnings were slightly better than expected, I’m inclined to think shareholders were excited about other aspects of the report.
‘Cheap oil’ came up several times during the Ford conference call. I expected Ford’s management to say that cheap oil prices were driving sales of big trucks and hurting sales of hybrids. They did not.
What the management team did say about cheap oil is even more significant, however. Some highlights from the call include:

  • “The oil price decline is going to give us the opportunity to see reductions in logistics expenses and we are already seeing it as an opportunity for this year.”
  • “Consumer sentiment is improving, along with lower fuel prices, which will boost consumer spending, providing support for growth.”
  • “We could see positive impact in the rest of the country from lower fuel prices with more money in consumer’s pockets, plus the other thing that’s encouraging, you look at the latest housing numbers in terms of starts and permits, et cetera.”

What it boils down to is the fact that cheap oil puts more money in the hands of consumers. More money in the hands of consumers is great for Ford and great for our economy.
It also means more homebuilding activity. The is great for the economy but also for Ford, as the F-series trucks are a big hit with contractors and construction companies.
The company launched a total of 24 cars in 2014 with another 15 planned in 2015. Not only are these launches expensive, they require discounting to clear out old inventory to make room for the new models. As such, Ford is expecting much higher margins in 2015 – 8% to 9% rather than the 3.9% achieved in 2014.
Yes, Ford intends to double its profit margins in 2015.
Ford CEO Mark Fields has been on the job for less than a year, but he appears to be successfully executing Ford’s plans to reorganize its operations, focus on core brands and grow around the world.
For 2015, analysts estimate that Ford will report EPS of $1.61. That represents a 39% increase from last year. Meanwhile, sales are expected to grow 6.5%.
Yet most investors are still cautious on Ford. With shares trading at just under $15, the P/E ratio stands at 9-times this year’s EPS estimates. That’s cheap, even for a company that had mixed results last year.
Ford made a lot of progress in 2014. Looking forward to 2015, the company will benefit from improving consumer confidence and cheap oil. Despite the challenges last year,  the outlook for Ford in 2015 is great.

Cheap Oil Here to Stay – For Now 

Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder. Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom. Click here for all the details.

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