Super Duty launch costs will weigh on the third-quarter. Image source: Ford Motor Company.
Early Thursday morning, Ford Motor Company (F +4.11%) investors heard the words they hoped wouldn't be spoken in 2016.
"We're starting to see a maturation of the economic cycle," said Ford Chief Financial Officer Bob Shanks, according to the Associated Press.
Rather than being a surprise to investors, it was more of a confirmation of the industry's cyclical gloom, which has driven major automakers' price-to-earnings ratios into the mid-single digits. Here's a rundown of Ford's second quarter, what's driving the stock price down roughly 9%, and what's next for investors.
By the numbers
Ford's top-line revenue moved $2.2 billion higher, compared to last year, to a Q2 total of $39.5 billion. Other than Ford's $4.2 billion in automotive operating cash flow, a $2.3 billion increase over last year, that's basically the end of the good news in terms of year-over-year comparisons.
Ford's wholesales were down slightly to 1.69 million units, and adjusted pre-tax profit checked in $293 million lower for a second-quarter total of $3 billion. Ford's automotive operating margin moved 70 basis points lower to 7.7%. Ultimately, despite being a strong quarter in total, Ford's adjusted earnings per share checked in two pennies lower than last year to $0.52, well short of analysts' estimates of $0.60.
Shanks had more words Ford shareholders didn't want to hear.
"We saw higher U.S. incentives -- that was for the industry and for us. The industry increased and we increased in line with the industry." Shanks said, according to Bloomberg.
And the incentives did cost a pretty penny when you look at Ford's automotive pre-tax graph.
Graphic source: Ford's Q2 earnings presentation.
A surprising bright spot
Ironically, the region that has long been a thorn in Ford's side, Europe, was a bright spot during the second quarter. Ford's wholesales were up 11% in the region, which pushed its revenue 16% higher. Its operating margin there jumped 350 basis points, from 2.3% to 5.8%, which pushed its pre-tax profit 190% higher to $467 million.
Of course, there's a caveat. The region will face pressure in the back half of the year and beyond, thanks to the U.K.'s decision to leave the European Union. The U.K. generates about 30% of Ford's European sales, so the anticipated economic troubles there will be have a definitive negative impact. Ford noted that it expects the Brexit will cost the company $200 million this year and between $400 million and $500 million in each of the next two years.
Outside of Europe, though, Ford's regions faced challenges. Its Asia Pacific region swung to a loss of $8 million, which was $202 million lower than the prior year's Q2. Middle East & Africa posted a loss of $65 million and South America moved $80 million lower to a loss of $265 million.
Guidance at risk
Another factor that weighed on Ford's stock price Thursday morning was the company's concern about its guidance. While investors should expect a strong full year of results in total, with pre-tax profit and operating margin equal to or better than last year, the second half of 2016 will be weaker than expected. Specifically, Ford's third quarter will be a bit challenging, with the Super Duty launch costs, the Brexit impact taking hold, foreign currency headwinds, and declining U.S. auction values weighing on Ford Credit. To help reach its guidance, Ford is working to cut costs, which it managed to do by a significant $1.6 billion during the first half.
Investors could easily put a positive spin on Ford's results. Its cash flow and cost cutting results were impressive, and margins remain near record highs. It was one of Ford's best second quarters ever. Its pre-tax results are expected to remain very high for the full-year and its European turnaround is bearing fruit. However, it's also difficult for investors not to feel like this is as good as it gets, and that the plateau of the U.S. new-vehicle sales cycle has arrived.
All is not lost, though, and if incentives trend lower and cost-cutting continues to progress, Ford will remain on track to meet expectations for the year.
