November Sales Were Strong Due To Incentives & Launches
I just believe that investors are reading too much into the November numbers which although were encouraging still only portray a short-term trend. In fact, if we go back to the company’s third-quarter earnings we can see that automotive operating margins fell to 5% when we exclude the return of door latches. Moreover, pre-tax income slipped by 56% which was primarily because of launch costs for the super duty and higher commodity costs as discussed. It will be relatively easy to report a strong fourth quarter after a relatively poor third quarter where costs were highly elevated. What I am reading into the bullish expectations for next quarter is that it will only be a short-term occurrence. The 10% increase in retail sales (1) in November along with the 11% spike in F-series truck sales for me is down to two temporary metrics. First is the launch of the brand new super duty series trucks and the second is the strong incentives Ford has been offering for purchases before year-end.
Also Read: Ford Stock: Is Europe The Key To Success For Ford Motor Company (NYSE:F)
Can Ford’s Balance Sheet Keep Up With The Competition Over The Long Term?
Ford Motor Company (NYSE:F), though not a dividend aristocrat, is a well-recognized dividend option due to its high yield and the special dividend. The stock with its present 4.8% yield and over $12 billion in free cash flow on a trailing 12-month average are big calling cards for dividend investors. However, it always amuses me why investors do not study historic fundamentals. For example in 2008 free cash flow levels reached -$6.8 billion. Moreover, from 2007 to 2010 there was huge negative equity on the balance sheet and the company also had an average of $120 billion in long-term debt. Equity balances in auto companies such as Ford are just not stable which is why any contractions in the global economy could easily wipe out the company’s equity in a matter of a few quarters. Long-term investors should definitely be wary of the huge investment levels that have been targeted for the autonomous area (2) over the next few years. Although Ford is one of the frontrunners in this space at present, it does not have the strength in its balance sheet to compete against its competitors if autonomous spending needs to remain elevated over time.
Therefore investors need to take the upcoming 4th quarter results with a pinch of salt. They are going to be impressive but they will not necessarily mean that earnings will remain elevated. Inflation and commodity strength are worrying headwinds which should be monitored closely.
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The article Don’t Get Lured By Dead Cat Bounce In Ford Motor Company (F) Stock originally appeared on amigobulls.com. Watch our analysis video on F.
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Additional Links
(1) https://media.ford.com/content/fordmedia/fna/us/en/news/2016/12/01/2016-november-sales.html
(2) http://www.theverge.com/2016/11/29/13781492/ford-self-driving-car-tests-planned-europe-2017
(3) http://amigobulls.com/stocks-to-buy/top-auto-stocks/?ref=il&ref=im
