Ford Motor Co - Zacks Investment Research



|Ford Motor Co. |(F-NYSE) |$11.20 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update.

Previous Edition: Flash Update; 1Q18 Earnings, Apr 25, 2018.

Brokers’ Recommendations: Neutral: 78.6% (11 firms); Positive: 21.4% (3); Negative: 0.0% (0) Prev. Ed.: 11; 2; 1

Brokers’ Target Price: $13.60 (↑ $0.60 from last edition; 10 firms) Brokers’ Avg. Expected Return: 21.4%

Portfolio Manager Executive Summary

Ford Motor Company (F) is a global producer of trucks and automobiles as well as a financial services and mobility company. It operates in three segments: Automotive, Financial Services and All Other. Ford’s core and affiliated automotive brands include Ford and Lincoln. Its automotive-related services include Ford Credit. Ford Smart Mobility designs, builds, grows and invests in mobility services.

Of the 14 firms in the Zacks Digest Group covering the stock, 11 provided neutral ratings, three assigned positive ratings and none rendered a negative rating. Target prices were provided by 10 of these firms.

Neutral or equivalent outlook (78.6%; 11/14 firms): These firms are hopeful about Ford’s ability to boost profits. They expect the automaker to gain from its investments in infrastructure, border adjustment tax reform and exposure to the Russian economy. However, they are concerned about the competitive and cyclical nature of the automotive industry and stiff competition from other American as well as Japanese, Korean and European automakers. Further, Ford’s market share expansion has been affected by the ongoing weakness in South American markets as well as its late entry into the world’s largest automobile market, China. These firms expect Ford to benefit from its investments in new product launches. They believe that the automaker will win market shares on the back of its refreshed product portfolio. However, they remain concerned about deteriorating demand in South America. Headwinds related to Brexit and the competitive environment in North America and China also pose concerns.

Positive or equivalent outlook (21.4%; 3/14 firms): The bullish firms believe that Ford will benefit from strong product mix, higher volume, lower costs, de-risked balance sheet, product launches, the success of its One Ford plan, operational restructuring and rising sales in North America. Additionally, the company is positioned to benefit from the rising demand for the new F-150 vehicle. The firms are also optimistic about Ford’s quality improvement initiatives and ability to generate profits even during a downturn. They consider Ford to be in a more advantageous position than its peers due to its innovative products, which offer updated technologies and better fuel efficiency. Ford also strives to bring parity between inventory and market demand in order to drive profitable growth.

May 3, 2018

Overview

Michigan-based Ford Motor Company is an automotive, financial services, and mobility company with operations in the United States and across the world. The company manufactures and distributes automobiles in 200 markets across six continents.

Ford is one of the largest automobile producers in the world and the second leading in the United States, and a top supplier of auto financing through its subsidiary, Ford Motor Credit. Although the primary selling ground of Ford is the United States, other major markets include Europe, South America and the Asia Pacific.

Ford has three reportable segments – Automotive, Financial Services and All Other. The Automotive segment covers five regional business units: North America, South America, Europe, Middle East & Africa and the Asia Pacific. The Automotive segment (which generated roughly 92.9% of the company’s total revenues in 2017) is engaged in the design, development, manufacture, sale and service of cars and trucks as well as service parts, and accessories.

The Financial Services segment (7.1%) deals with vehicle-related financing and leasing activities at Ford Credit.

All Other consists of the Central Treasury Operations (formerly Other Automotive) and Ford Smart Mobility LLC operating segments. The Central Treasury Operations is primarily involved in decision making for investments, risk management activities, and providing financing for the Automotive segment. Ford Smart Mobility is a new subsidiary that was established by Ford to design, build, grow, and invest in emerging mobility services.

The analysts identified the following factors for evaluating the investment merits of Ford:

|Key Positive Arguments |Key Negative Arguments |

|Higher Industry Volumes: The company’s results are benefiting from the|Increased Competition: Ford faces rising competition from foreign |

|rise in industry sales volumes in North America. |companies as they increase exports to the United States and expand |

|Smaller Vehicles: Ford plans to focus on smaller and more |production capacity. |

|fuel-efficient vehicles that will result in a more balanced global |Brexit Impact: Negative impact from Brexit could hurt employment rates|

|portfolio. |and purchasing power, thus reducing vehicle sales. |

|Building Wining Portfolio: Ford plans to focus on trucks, utilities | |

|and commercial vehicles instead of traditional sedans. | |

Further information on the company is available at .

Note: The company’s fiscal year ends on Dec 31.

May 3, 2018

Long-Term Growth

Ford’s accelerated product transformation plan “One Ford” is positively influencing the company. The primary mission is to produce common vehicle models for all of its global segments. Another key objective of the plan is to shift focus from trucks to small cars and deliver more vehicles from fewer core platforms.

Moreover, the company expects to meet the challenges in Europe and South America by executing its One Ford plan. It already renewed the majority of its product line up albeit a few discontinuations. Also, it planned several launches under the program. By 2020, almost 90% of its portfolio in North America will consist of trucks, utilities and commercial vehicles. Due to waning consumer demand and lower profitability, the company will not invest in traditional sedans for North America. Instead, Ford’s car portfolio in North America will mainly focus on Mustang and the all-new Focus Active crossover.

The automaker will also add more electrified products under the Ford and Lincoln brands. Ford aims to make its EVs more attractive to buyers compared with what it did in the past. A few electric vehicles will be produced with Ford’s joint venture in China aimed at the Chinese market.

Ford is likely to raise its planned investment in EVs to $11 billion by 2022. Also, the auto giant has plans of launching 40 hybrid and fully EVs by that time. The latest proposed investment amount is considerably higher than the previously committed $4.5 billion by 2020.

Ford is rapidly working on bringing autonomous vehicle technology to the market. The company will add several driver-assist technologies to its vehicles over the next few years.

In 2014, Ford created a new business unit, Ford Middle East & Africa, to capitalize on the growing importance of the Middle East and African markets. To strengthen its foothold in this lucrative market, Ford plans to launch new vehicles in these regions. The company also intends to make customer support and car parts easily available there. The automaker plans to take advantage of the growing market to increase its sales in the small, mid-size and large vehicle segments.

In the long run, Ford expects all automotive business units and Ford Credit to be profitable. The company anticipates annual global sales to increase 45%–55% to nearly 9.4 million by 2020. The company is now targeting 8% adjusted EBIT margin in 2020.

The company expects that the total Middle East & Africa car market will improve by 40% to 5.5 million vehicles by 2020, and its sales in the region will surpass the industry sales growth. Ford is also targeting positive operating-related cash flow, capital spending of about $9 billion per annum and investment grade profile of “A” by 2020. Further, the company aims to sell 300,000 Lincoln vehicles, backed by the brand’s launch in China and improved market coverage. Ford also plans to launch two Lincoln vehicles, apart from the MKZ and MKC by 2020.

Ford projects compact car sales in India to increase to 1.6 million vehicles in 2018 from 1.1 million units in 2014. The company expects to benefit from its focus on manufacturing operations in India.

The bullish firms believe that Ford’s balance sheet and earnings will improve in the long run. The firms with a neutral outlook believe that Ford’s market share growth will be limited in the long term due to stiff competition from the United States, Japanese and European automakers.

May 3, 2018

Target Price/Valuation

Provided below is a summary of target price/valuation as compiled by Zacks Digest:

|Rating Distribution |

|Positive |21.4%↑ |

|Neutral |78.6% |

|Negative |0.0%↓ |

|Avg. Target Price |$13.60↑ |

|Digest High |$15 |

|Digest Low |$11↑ |

|No. of Analysts with Target Price/Total |10/14 |

Risks to the target price include unfavorable pricing changes, the highly cyclical nature of the global auto industry, slow recovery of the U.S. economy, increase in interest rates, inefficiency of dealership networks, loss of market shares to competitors as well as market shift from the sales of trucks, SUVs or other more profitable vehicles to less profitable ones.

Recent Events

On Apr 25, 2018, Ford announced its 1Q18 earnings results. The quarterly highlights are as follows:

• Total revenues (GAAP) were $42 billion in 1Q18, increasing $2.9 billion from the 1Q17 figure.

• Adjusted EBIT was $2.2 billion in 1Q18, down $0.3 billion from the year-ago quarter.

• Adjusted earnings per share (EPS) were 43 cents in 1Q18, reflecting an increase of 3 cents from 1Q17.

Revenues

Revenues (GAAP) in 1Q18 increased $2.9 billion year over year (y/y) to $42 billion. Ford logged automotive revenues of $39 billion, up from the 1Q17 figure of $36.5 billion. The Zacks Consensus Estimate for revenues was $37 billion.

Segment Details

Ford Automotive: Ford logged revenues of $39 billion in 1Q18, up $2.5 billion from 1Q17. Wholesale volumes decreased 41,000 units to 1.66 million.

In 1Q18, in North America, revenues increased $0.8 billion to $24.8 billion. Wholesale volume increased 25,000 units y/y to 796,000.

In South America, revenues increased $0.2 billion to $1.3 billion. Wholesale volumes rose 16,000 to 86,000 units.

In Europe, revenues increased $1.3 billion to $8.9 billion. Wholesale volumes remained flat around 449,000 units.

In the Asia-Pacific region, revenues increased $0.2 billion to $3.4 billion. Wholesale volumes declined 77,000 to 306,000 units.

In the Middle East & Africa segment, revenues remained flat around $0.6 billion. Wholesale volumes plunged 5,000 to 25,000 units.

Financial Services: Ford Credit generated EBIT of $641 million, up from $481 million in the prior-year quarter.

Outlook

The company anticipates rise in product launches in FY18, reflecting better product mix and pricing.

Revenues in FY18 are likely to be modestly higher than the FY17 number. Automotive revenues in FY18 are expected to be flat to lower in comparison with FY17, being adversely impacted by higher commodity prices and unfavorable exchange rate. Revenues from mobility services will be under strain, on account of huge investments in autonomous vehicles and mobility services and/or capabilities.

According to the firms, the global automotive industry remains highly competitive and cyclical. They expect auto demand in North America to moderate though remaining robust. However, expenses are likely to rise on account of huge investments in new-vehicle technologies. These negatives will be offset by opportunities, generating from increased global demand.

The firms also opine that huge investments by the auto giant in electric and autonomous vehicles are needed to compete and fetch plenty of opportunities. But, the firms believe that heavy capital investments will pressure profitability, going forward.

Margins

Ford’s adjusted EBIT was $2.2 billion in 1Q18, down $0.3 billion from the year-ago quarter figure.

Segment Details

Ford Automotive: The segment’s pre-tax profit decreased to $1.7 billion in 1Q18 from $2.1 billion in the year-ago quarter.

EBIT from North America decreased to $1.9 billion from $2.1 billion in 1Q17.

Ford’s South America segment’s EBIT amounted to negative $149 million in 1Q18.

The Europe segment’s EBIT amounted to $119 million.

The Asia-Pacific segment generated EBIT of negative $119 million in 1Q18.

The Middle East and Africa segment generated EBIT of $54 million in 1Q18.

Financial Services: Ford Credit generated EBIT of $641 million, up $160 million from the prior-year quarter.

Outlook

The automaker faces several expense-related headwinds from product launches and higher tax rates. The firms are, nonetheless, hopeful about Ford’s efficient cost management. Also, strong light-truck and SUV trends in North America are expected to have a favorable impact on operating margins.

Earnings per Share

Ford posted adjusted earnings per share of 43 cents in 1Q18. The reported figure was 3 cents higher than 1Q17. Earnings beat the Zacks Consensus Estimate of 41 cents.

Outlook

For FY18, the company expects adjusted EPS of $1.45-$1.70, unchanged from the previous outlook. Rise in commodity prices and the adverse effect of the exchange rate can be attributed to this unfavorable outlook.

Firms expect the company’s product launches to increase earnings. However, increasing reliance on incentives to drive higher volumes, along with uncertainty in Europe and South America, might negatively impact its earnings potential. Moreover, Ford is investing heavily in emerging opportunities, specifically in the electrification and the development of autonomous vehicles, which may limit its earnings potential in the short run.

May 3, 2018

|Analyst |Sanjoy De |

|Copy Editor |Sreya Mukherjee |

|Content Ed. |Anindya Barman |

|Lead Analyst |Sanjoy De |

|QCA |Anindya Barman |

|No. of brokers reported/Total brokers |14/14 |

|Reason for Update |1Q18 Earnings Update |

-----------------------

May 3, 2018

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download