In a move which has sent shares of automaker Ford Motor (F 12.12, -0.98 -7.48%), the company announced last night plans to improve operations, refocus capital allocation and accelerate the introduction of its smart vehicles.
Most investors are pointing to the in-line 2018 adjusted earnings guidance and the 2017 guidance update as impetus behind today’s move.
Ford now sees preliminary FY2017 adjusted EPS of $1.78 (GAAP $1.95) with 2018 adjusted EPS of $1.45-1.70. For 2018, the company also gave expectations for revenues to be about flat to up modestly as favorable company-specific drivers will more than offset the effect of slightly lower volumes in the U.S. The company also anticipates ending the year with a strong balance sheet with automotive cash of $26.5 billion and automotive liquidity of nearly $37 billion. As for the recently announced tax reform, Ford management stated that it does not believe the impact on the company will be material in 2017. As for 2018, Ford expects a potentially higher distribution to Ford from Ford Credit as a result of the tax reform.
Preliminary 2017 results:
Ahead of formal earnings next Wednesday, Ford announced preliminary 2017 results. The company noted 2017 results will include the impact of a non-cash pre-tax re-measurement loss of about $150 million related to the year-end revaluation of global pension and other postretirement employee benefits (OPEB) plans, also known as pension mark-to-market adjustment. Management highlighted at last night’s Deutsche Bank investor conference that higher steel, aluminum and costs of other metals would likely cost Ford about $1.6 billion.
Adjusted pre-tax profit came in at $8.4 billion, which is down nearly $2 billion from 2016. Market-to-market re-measurement this year was about negative $165 million, compared with nearly negative $3 billion a year ago. Operating margin for the automotive business was 5%, down 170 basis points. Automotive operating cash flow came in at $3.9 billion, down about $2.5 billion from 2016 driven mainly by lower profit. Further, the company ended last year with a strong balance sheet with automotive cash at $26.5 billion and total liquidity of nearly $37 billion.
Additionally, as a result of the company’s performance in 2017 Ford’s Board of Directors declared a first quarter regular dividend of $0.15 per share and a $500 million supplemental cash dividend that is equal to $0.13 per share. This provides a combined total of $0.28 per share of dividends on the company’s outstanding Class B and common stock.
Laying out the company’s plans, which according to management will take about five years to complete, the company plans to cut available customization options on certain models. Management also highlighted an update to the development process, the increase of the use of modular product architectures and the overall shift to utility models as areas of change going forward. Further, the company plans to slash marketing costs by about $200 million going forward as management admitted the business structure has been out of sync with the company’s outlook on revenues.
To address the plans to improve operations, Ford management will employ a new reporting structure in 2018 whereby business segments will include Automotive, Ford Credit, Mobility and Corporate Other. Automotive will exclude Autonomous Vehicle results and all corporate governance costs related to mobility-related expenses. Mobility will include Ford Smart Mobility LLC along with other AV results. Ford Credit will see no change to reporting conventions. Lastly, Corporate Other will report corporate governance costs, interest income and portfolio gains and losses.
Addressing the long-struggling South-American business, Ford management highlighted that it is exploring every option to achieve success in that market.
Ford’s model moves center around lowering volumes of its passenger car lineup in North America and Europe in favor of more broadly demanded models like the Ford Edge ST and the upcoming Bronco model. The move will effectively skew the company’s development toward SUV models which will see a mix increase of 10 percentage points, while its car portfolio will shrink about 10 percentage points. Additionally, Ford expects to change their approach to electrification by investing in seven battery electrics by 2022 in North America. The company highlighted, among other models, the electrification of iconic Ford models like the F-150 and the Mustang. The result of the higher investment in electrification will be a dropdown of investment in internal combustion power trains. All told, Ford expects to spend north of $11 billion by 2022 to achieve goals of 16 dedicated battery electric vehicles by that time.
Ford’s expectations came in a bit light, especially when compared to rival General Motors’ (GM 43.95, -0.24 -0.54%) guidance from Tuesday morning.
Ford, and other automakers for that matter, are bound for a huge undertaking in the coming years wherein automakers are expected to keep up the pace of innovation as customers become more and more dependent on autonomous, user-friendly technology. Gone are the days when you’d have to warm up your 1970 Chevelle in the driveway for half an hour. Innovation is king now, and as Ford sets in for the long road ahead, the stock still sits modestly above the 200 day simple moving average near the $11.70 level, albeit on a modest trend higher from summer 2017 levels – notwithstanding today’s move.