Morningstar

Ford Held Back by Launch Costs, Recall Charge

We maintain our fair value estimate for the automaker despite continued headwinds.

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Ford Motor Co
(F)

We are not changing our fair value estimate on

EPS fell by 50% year over year as dealer stock reductions in North America and Europe, fixed cost increases, and a $599 million recall charge for door latches easily negated a $616 million favorable pricing variance from vehicles such as the new Super Duty pickup. Automotive operating margin declined by 440 basis points to 3.3% but was 5% excluding the recall. The key North American segment saw its pretax income fall by 57% to $1.3 billion due to an 11% decline in wholesale volume, Super Duty launch costs, the door latch recall, and higher material costs.

Europe had its best third quarter pretax income since 2007 and even had an $88 million positive earnings variance from foreign currency due to the company being mostly hedged this year prior to June’s Brexit vote. That protection will not be there next year, and management in September guided to about a $600 million earnings headwind from Brexit in each of 2017 and 2018. The Asia-Pacific unit posted a record third quarter with good results in many markets, and equity income from Chinese joint ventures rose 26.5% year over year to $340 million. Year-to-date Chinese equity income is up 3.4% to $1.059 billion. Ford Credit had its best quarterly profit in five years. Write-offs and delinquencies did rise year over year, by 11 and three basis points, respectively, but are nowhere near a level that would make us worry.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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