Ford (NYSE: F) posted a better-than-expected month in August with sales increasing 4.1% following a weak July. Truck sales continued to remain strong as consumer preference shifts to larger automobiles due to lower gas prices and improving economy. This sales mix is driving higher margin sales; however, quarterly revenue and GAAP net income were lower in the 2nd quarter earnings release due to various headwinds including Asia/Europe sales, supply chain disruption, and higher commodity costs. Management is putting restructuring plans in place, which is expected to make cash flow tight over the next few years; however, I believe management is committed to paying the current dividend and the short-term pains during the restructuring will be worth the changes made to the organization. With a below-industry-average P/E, over 6% dividend yield, and strengthening core business, I continue to recommend Ford as a buy for the value buy-and-hold investor.
Monthly Sales Data
Ford announced August 2018 U.S. vehicle sales of just over 218.5K, up 4.1% from August 2017. The results were well above estimates from Edmunds who was expecting a decrease of 1.8%. Overall, the industry as a whole saw increases with forecasters at Edmunds.com and Cox Automotive estimated overall sales increases of 1.2% and 0.8%, respectively. Ford was clearly above the overall industry bump due to the continued market shift to crossovers, SUVs, and pickup trucks and abandoning passenger cars which work favorably for Ford. Passenger cars only made up 30% of the market for the month, which is well below prior averages where cars once made up over half. While volume is down, this is allowing automakers to take advantage of the higher gross margin vehicles and pad their bottom lines.
Given the overall industry’s sales increase, Ford wasn't the only major automaker seeing an increase in August. Most saw increases including--Honda (NYSE:HMC) +1.3%, Hyundai (OTCPK:OTCPK:HYMLF) +6%, Nissan (OTCPK:OTCPK:NSANY) +3.7%, and Fiat (NYSE:FCAU) +10% in the month. The only major automaker to post a loss was Toyota (NYSE:TM) -2%. Based on the data, it's clear that August was a successful month in terms of quantity for the industry as well as the industry benefiting from the shift to more profitable SUVs and trucks. With this shift, the competition in the truck and SUV/crossover market is continuing to intensify. Despite this competition, the industry is experiencing lower discounting and zero-percent loan offers. These macroeconomic conditions have the average vehicle price for the month of August, before discounts, up to $35,541 which was 1.8% higher than a year ago. While this is the industry trend, Ford isn't an exception. Ford's overall average transaction price gained $1,400 versus the industry average gain of $700.
For Ford, see the below chart showing the monthly U.S. sales for the trailing 12 months. Aside from January 2018, U.S. monthly sales have largely remained between 200,000 and 250,000. This didn't happen in July as Ford fell short which marked only the 3rd month over the trailing 12 months to fall below the 200,000 sale threshold.
Source: Image created by author with data from monthly Ford press releases on
Ford's increase in August sales was largely fueled by increases in the SUV and truck segments increasing 20.1% and 5.7%, respectively. The only segment to post a decrease was the car segment at -21.3% as consumers continue to shift away from smaller vehicles in favor of larger vehicles. This is especially favorable to Ford with the success of the F-150 and has helped drive Ford’s transaction price higher. This shows that Ford has the right mix of cars to take advantage of the consumer shift to larger vehicles. Ford's success is coming, as a result, of the success of the F-Series, Expedition, EcoSport, and Lincoln Navigator. The F-Series continued its momentum of sales growth as sales neared 82,000 trucks in August which marked 16 straight months of year-over-year gains. Additionally, customers are continuing to move away from the base model and are selecting crew cabs and higher-trimmed vehicles. This is evident as the high trim series Super Duty made up more than half of Super Duty retail sales, with record Super Duty pricing of $58,700. Other large vehicle brands are taking advantage of the shift, including the Navigator, Expedition, EcoSport, which provide Ford with competitive SUV options that are driving sales numbers and profitability.
See below chart showing the monthly U.S. sales fluctuations for Ford compared to the same month a year ago. As you can see, Ford's monthly results have been all over the place and the decrease in July is not unusual in the past 12 months as several months have declined a larger rate. As I always disclaim with short-sighted metrics, it shows that an investor should not get excited based on monthly results alone. Investors should be more focused on financial results and the monthly quantity sold.
Source: Image created by author with data from monthly Ford press releases on
Ford's vehicle inventory finished August at 75 days' supply, which is consistent with the same figure in July 2018 but down slightly from August 2017’s metric of 85 days’ supply. While this level of inventory is concerning, it helped Ford weather a disruption in its supply chain reported in early May. The disruption was a fire at Meridian Lightweight Technologies in Michigan. Meridian is a China-owned automotive-interiors supplier to Ford and other automakers. The impact on Ford is huge as it halted all production of F-150 pickup trucks, which is the company's most profitable and popular model. In response, Ford shifted some parts production to Ontario as a result of the fire which allowed the company to recently restart F-150 production ahead of schedule. Ford worked with their vendors to restart impacted operations in just 8 days. However, as expected, this had an impact on the second quarter's earnings; however, the company is citing weakness in Asia and Europe for lowering the full year 2018 guidance.
China has been a troubled market for Ford to replicate its success in the U.S. This continued in August where the company announced another dismal monthly result with a year-over-year of 36%, putting the year-to-date decrease in 2018 at 27%. While this is a much smaller number of Ford vehicles, at only 63K being sold in China compared with 219K in the U.S. in August 2018, it shows that Ford is struggling to replicate its success in China. This is likely to get even more difficult with China announcing tariffs of between 2.5% and 25% on imported cars. As a result of this tension, Ford's imports into China are being delayed at Chinese ports amid these tensions, which is bad news for Ford which is anticipating an increase in shipments to China. At this point, it's difficult to get excited about Ford's possibility in China; however, the company is set to release a more upscale Ford Focus in China which could help boost sales. Regardless, I don't expect any short-term favorability from this region as management expects it to be a drag on short-term operations.
When Ford reported second-quarter 2018 earnings, revenue of $38.92 billion was able to surpass estimates while earnings per share of 27 cents disappointed. The lower than expected earnings per share along with management lowering the range for the full year 2018 adjusted earnings per share guidance to $1.30 to $1.50 caused the stock to move lower. While the company dealt with supply chain issues in North America, the F-Series is on a record-setting pace through the first 6 months of the year. Instead, management focused on Asia and Europe for the lowered guidance. In Asia, the company is focusing on improving local management, cost reductions and localizing more product in China. Additionally, the company is refreshing 60% of its line-up over the next year and a half in efforts to turn around the business segment. In Europe, Ford is going to focus on the Ranger. The Ranger is the bestselling pickup in the market and is the main reason for Ford being the light commercial vehicle leader. Ford is going to allocate resources to this product while focusing on cost reductions. The turnarounds in these regions are key for Ford to unlock shareholder value as both regions posted negative Earnings before Interest and Taxes (EBIT).
Ford, along with most of the auto manufacturers, posted weakness in U.S. sales during August. This isn't a concern to me given recent success and Ford's success in selling higher margin vehicles and adding to the average transaction price. In the second half, Ford needs to continue to push high margin vehicles such as the F-Series trucks, Explorer, Edge, and Expedition. It's not important to focus on transactions, but more important to focus on Ford's product mix. Not only from a make, but also from a trim level and features standpoint. When the company released second-quarter 2018 earnings, the company posted a quarterly revenue decrease of 2% or nearly $1 billion lower. This lower revenue fell directly to the bottom line as GAAP net earnings also declined from last year by nearly $1 billion or 50%. While the net earnings are seeing a boost from the lower tax rate and cost-cutting measures, the company faced higher commodity costs mostly due to the steel tariffs, the supply chain disruption, and weakness in Europe and Asia. Despite impressive sales in the U.S., Ford disappointed in the quarterly earnings call.
It's only going to get more difficult as the industry is expecting to face pressure in the second half of the year. The pressure is a result of increasing interest rates, less built-up demand and an abundance of used vehicles on the market. This means the pie is likely to get smaller in the U.S. market, which could erode not only Ford's sales but also its impressive transaction gains as competitors utilize higher incentives to attract business. Given Ford's ability to sell SUVs and trucks, I think it is in a good position to compete in a tightening marketplace but it must make strides in other markets to grow value.
In response to the consumer sentiment toward large vehicles, Ford has announced that it would discontinue the Fusion, Taurus, and Fiesta cars within the next few years. Ford wasn't the only automaker to respond this way, with General Motors planning to reduce production on the Cruze compact car and considering stopping production on the Impala and Sonic sedans. As we saw with the Great Recession, consumer sentiment can shift at any moment, and with rising fuel prices, Ford shouldn't completely abandon fuel-efficient cars from its portfolio. However, with the SUVs and Trucks becoming more fuel efficient, this hopefully won't be an issue.
As evidenced by the earnings release, Ford, as well as other domestic auto manufacturers, are seeing uncertainty around tariffs. Given the current administration's proposed tariffs on steel at 25% and aluminum at 10%, it is likely to result in higher commodity prices for Ford despite the company using mostly American steel manufacturers. During the 2nd quarter, the company estimated that the tariffs had a $300 million impact. Experts are estimating that this could have a $1 billion cost impact on Ford which is approximately 12% of Ford's profit in 2017. However, there is still a lot to be figured out as the administration is also considering ways to require imported cars to meet stricter environmental standards when entering the U.S. in order to protect domestic automakers.
After a sluggish month, the stock decreased slightly in value to approximately $9.45 per share down from $9.75 a month earlier due to a Moody’s downgrade. At this level, the Price-to-Earnings Ratio (P/E) of approximately 5.6 appears to be undervalued compared with the current S&P 500 mean P/E ratio of 20.7, but more importantly the industry average of 11.8. I would expect Ford and industry to be below the current S&P 500 given that it’s a value stock, the current economic cycle, and uncertainty regarding tariffs; however, Ford's P/E ratio shouldn't be trading at half of the industry average.
As stated above, the biggest newsworthy event during the month was a downgraded by Moody’s. Moody’s downgraded Ford to just above junk status citing its believed negative outlook for the automaker. More specifically, they cited weakening margins in North America and continued difficulties in Europe and China. Given these struggles plus restructuring initiatives (cash-related effects of $7 billion forecasted over the next 3 to 5 years), investors are projecting cash flow issues for the company in 2019 and beyond. Despite this, I still don’t see this impacting the sacred dividend. In the first half of 2018, the company paid out dividends of $1.7M while it generated $5M in operating cash. Additionally, the company had approximately $9M cash (net of debt) to continue funding the dividend, capital investments, and restructuring costs. Management discussed this issue during the earnings call:
It's important to highlight that we believe we can fund these cash effects without impinging on our other capital outlays including investments for growth and our regular dividend. You'll note that all of the metrics for the quarter were lower than a year ago. These declines were primarily driven by lower volume of high margin products in our North America business due to production disruptions caused by Meridian, along with performance issues in our China operations.
Given the low valuation and the company's dividend yield over 6%, I believe the stock is attractive at current prices. While the domestic auto sales are expected to continue retreating in 2018, Ford is perfectly positioned to continue increasing its average transaction price with its larger vehicle offering, including the F-Series, Edge, Flex, and Explorer. Additionally, the company is focusing on China and autonomous vehicle-driving technology. I'm excited about the company's future, and I recommend owning the company's stock with a long-term view. With consumers purchasing more expensive vehicles, it will allow Ford to report stronger top-line and bottom-line growth going forward.
Furthermore, I believe Ford has a strong product mix to take advantage of the growing market and will pay investors a near 6% dividend yield to own the stock. Ford’s management is committed to paying the current dividend and the company should be able to generate the cash flow from operations to continue funding it. While I do expect some short-term pressure as the company restructures to become a more lean company, I think the company will come out in better shape on the other side. However, I will continue to monitor how sales are performing in Europe and Asia along with the cash position; however, the success in the U.S. provides a stable value investment.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in F over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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