Ford Motors Company (NYSE:F), the second largest US car maker, is set to report its second quarter of fiscal year 2016 (2QFY16) earnings on Thursday. By taking a look at the company’s key financial metrics, CBN analyzes whether its earnings will shine or remain in the red.
Last month, Ford said that its China sales surged 6% in the first half of 2016, however, throughout the second quarter, the performance wasn’t up to expectations. In total, the company sold about 577,097 vehicles in China during the first half. Similarly, Ford’s joint ventures in the world’s largest auto market also delivered a satisfactory performance during the first half. Changan Ford Automobile sold about 434,645 units during the first six months, representing a 5% increase on a year-over-year (YoY) basis. In addition, Jiangling Motor Corporation, another partner of the US car maker in China, sold about 121,514 units.
The overall incline was mostly due to tax incentives provided by the Chinese government. To boost car sales, the government reduced taxes on the newly bought vehicles by about 10% and dealers also provided significant discounts to customers.
Though the company’s first half sale numbers are satisfactory, it is important to highlight that Ford’s monthly performance in China wasn’t as good as previously expected. Car sales in May and April dropped significantly before recovering in June. In May, Ford China sales totaled 88,248 units, representing a 2.5% YoY decline. The decline was primarily driven by an economic slowdown in the world’s largest auto market.
Similarly, Ford’ sales in the US also grew significantly in the first half. The car maker reported best first half sales in a decade, primarily driven by higher demand for SUVs and F-series. In the first half, the company sold about 1,353,048 vehicles in the US, representing an increase of 5% YoY. Ford said in a press release: “Consumer demand for Ford SUVs also continues to surge to all-time highs, allowing us to introduce new levels of capability, versatility and technology to a whole new generation of SUV fans."
Ford Bets Big on China
The US automaker has placed huge bets on the Chinese market despite ongoing economic uncertainties in the world’s largest auto market. Ford generates more than $2.67 billion in revenue from Asia Pacific region, and China accounts for a huge chunk of that revenue. Recently, the company also spent more than $5 billion in the mainland territory to expand its operations and build new plants, which could be vital to its future revenue generation.
Ford has previously said that the UK’s decision to leave the European Union will hurt its business in the region. The company holds three plants and about 14,000 workers in the UK and accounts for 19% of its revenue from the European region. However, the recent event could hurt the company’s future sales in the potentially strong EU region, which could also lead to job cuts.
Net Income Estimates
Wall Street analysts expect Ford to shine in the second quarter. According to consensus estimate, the company is expected to report net income of $2.38 billion in the upcoming quarter. The estimates are raised by about 26.5% on healthy first half sales results. In the first quarter, Ford reported net income of $2.816 billion, surpassing analysts’ estimate by 49%.
According to consensus estimate, Ford is expected to report $36.278 billion in revenue for the quarter. Strong first half performance drove analysts to raise their revenue estimates by about 2%. In the first quarter, Ford reported revenue of $37.718 billion, surpassing analysts’ estimate by more than 5%.
The following table shows Ford’s revenue performance in the past five quarters.
Ford has surpassed analysts’ revenue estimates on three occasions and came very close to do so on another two occasions.
Higher car sales from China played a vital role in increasing the company’s revenue consistently throughout the past few quarters. We believe that China will yet again play a vital role in shoring up Ford’s revenue.
Earnings per share (EPS) Estimate
Wall Street analysts expect Ford to report EPS of $0.600 in the second quarter, raising their estimates by more than 26% due to the company’s solid first half results. The following data shows Ford’s EPS record in the past five quarters.
The company’s EPS performance has also shined in the past five quarters, narrowly missing consensus estimate on one occasion. We believe that the American automaker is all set to surpass analysts’ EPS estimates yet again this quarter.
Ford’s short interest for the first 15 days of June also dropped. In the first fortnightly period, the company’s short interest stood at 144.37 million shares from 148.30 million shares reported in the last fifteen days of May. The decline indicates that investors are positive about the company’s upcoming earnings results and more of them are hanging on to the US car maker’s stock.
The company’s short interest ratio was calculated using the average daily volume of 32.79 million shares. In addition, its short interest ratio stood at 4.4 days, implying that investors will require another four days to cover their short position. We believe that the upcoming earnings, if solid, will further deteriorate Ford’s short interest in the next 15-day period.
Ford’s Stock Rating
Ford stock has lost more than 4% of its value year-to-date. However, in the past six months, it has shown some signs of recovery by shooting-up more than 13%. Wall Street analysts are also optimistic on the company’s future outlook. Out of 21 analysts covering Ford, seven rate it as a Buy, 13 recommend a Hold and only one opts for a Sell. The long-term return potential stands at 2.6% and a short term potential of 4.4%, with a 12-month target price of $13.68.
We believe that the incentives provided by the Chinese government will only boost Ford’s sales in the short-term. Once the tax exemptions have been removed, car sales in China will most likely go down. But due to the company’s strong first-half performance in China and the US, it is likely that Ford’s second quarter earnings results are going to shine and cheer investors.
Ford Motor Company Group Vice President and President of Asia Pacific said: “We continue to see solid growth in China and the US during the first half. He further added, “Even as the pace of growth slows and the market matures, customers continue to respond well to our products, particularly our world-class SUV lineup.”