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Earnings

Will pandemic profit warning see Ford earnings put brakes on share price?

Ford’s share price has been bashed by the coronavirus pandemic. How fast can it hit the road to recovery?

As pandemic-induced lockdowns empty streets, roads and motorways, the automotive sector has suffered. The Ford Motor Company [F], one of its most iconic names, has seen its share price reverse from $9.29 at the start of the year to just $4 on 23 March — staging a minor share price recovery in the past month to sit at $4.89 on 23 April.

Analysts at Zacks state that the auto industry share prices have been rattled by “factory closures, low footfall at dealerships and supply chain disruptions”, adding that consumers are also putting off big-ticket, non-essential purchases.

When Ford reports on Tuesday 28 April, share price investors will be keen to see how much gas the company has left in the tank.

 

 

 

Driving down profits

Ford, which has shuttered most of its factories worldwide, laid out the damage the pandemic has caused in a profit warning ahead of its first-quarter results. It expects to post a net loss of $2bn for the first quarter compared with expectations of a $278.3m profit.

Revenues are likely to come in at $34bn, a 16% year-on-year decline for the quarter, and down from expectations of $35.4bn. The company says vehicle wholesale shipments have fallen 21% from the same time last year, while analysts estimate the closure of its factories is costing the group up to $165m per day.

$165million

Ford's estimated daily cost of factory closures

  

Zacks says that in its main market of North America, Ford’s revenues will reach $23bn, down from $25bn a year ago. It will have been hit, it adds, by lower demand for passenger cars and SUVs. In Europe, it forecasts revenues of $5bn, down from $7.6bn a year earlier.

In China, Ford announced in mid-April that first-quarter sales had dropped by 34.9% to 88,700 vehicles although demand grew in March.

 

Executives and investors react

In response to the uncertainty, Ford has suspended its dividend and borrowed $15.4bn from two credit lines to offset the cost of factory shutdowns. It has also managed to secure a lucrative contract with the US government, alongside General Electric [GE] to produce 50,000 ventilators.

What has made things more difficult for the company is the wear and tear it was already showing signs of before the pandemic struck.

The company’s share price is down by around 46% from where it was in 2005. More recently, it posted a net income of $47m for 2019, down 99% from 2018, as it battled against the faulty seats, loose wiring and a delay in the launch of its Explorer SUV. All combined, 2019 was a year that saw Ford’s profits and reputation suffer greatly.

46%

Ford's share price decline since 2005

  

It’s now embarking on an $11bn global restructuring project, which includes cutting costs and laying off staff. It’s also hoping to drum up excitement with several new launches — an off-road SUV and an all-electric Mustang SUV.

 

Market Cap$19.366bn
PE ratio (TTM)487.00
Operating Margin (TTM)1.70%
Quarterly Revenue Growth (YoY)-5.00%

Ford share price vitals, Yahoo Finance, 27 April 2020

 

Going up a gear

“Standard & Poor’s cut Ford’s credit rating on March 26. That cost Ford its investment-grade credit rating meaning that it has to pay more to borrow money,” said John Rosevear, writing in the Motley Fool.

“But sales of Ford's all-new 2020 Explorer were just hitting their stride in early 2020 and will likely be strong again once the economy reopens … Assuming that it will be able to restart its factories before September, Ford has plenty of cash to ride out the crisis,” he explains.

Looking at Ford’s past share price performance may also offer some solace. In late 2008, its share price was hovering at just $1.50. By the end of 2010, it had risen to over $16.

When this current shock passes, people will still want to drive to work, go on leisure breaks and may — given the noted improvement in pollution levels during the lockdown — want to do this in a brand-new electric SUV.

“I believe the stock is still undervalued. The price doesn’t reflect the reopening of the economy,” says Larry Ramer of InvestorPlace. “That reopening will, in turn, cause the number of miles driven to rebound, spurring more consumers to buy cars from automakers, including Ford … Exceptionally low gasoline prices will enable many people who want to travel to do a great deal of driving once they’re allowed.”

“I believe the stock is still undervalued. The price doesn’t reflect the reopening of the economy” - Larry Ramer of InvestorPlace

 

But not everyone is giving Ford the thumbs up.

“Just because [Ford] may survive, doesn’t necessarily make it a buy,” says Bret Kenwell, also in InvestorPlace. “Its biggest selling point to investors was its dividend. It is facing plenty of uncertainty and has little to no revenue.”

Much will depend on the course the pandemic takes, how long it will take for consumer demand to return and how soon Ford can re-open its factories.

Disclaimer Past performance is not a reliable indicator of future results.

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