Ford Motor Company (F 2.73%) released its guidance for 2018 at a conference for investment analysts last week, and added some details during its fourth-quarter earnings report on Wednesday evening.
Simply put, the Blue Oval expects its 2018 profit to be lower than 2017's, largely -- but not entirely -- due to factors beyond its control. Let's take a closer look.
Ford thinks its revenue will be strong in 2018
First and foremost, Ford expects its 2018 revenue to be flat or slightly higher than its 2017 result. On the one hand, CFO Bob Shanks said at last week's conference, Ford expects slowing sales in the U.S. to be a headwind. That's a real concern: The U.S. new-vehicle market is likely past its cyclical peak, and while sales are still strong, competitive pressures on Ford's pricing are rising.
On the other hand, Shanks said, Ford expects to largely offset those headwinds with some new products, the ongoing shift in consumer preference away from (lower-profit) sedans toward (higher-profit) SUVs, and with better results from growing markets in Brazil, Europe, and China.
(For reference, Ford generated $156.8 billion in revenue in 2017, up from $151.8 billion in 2016.)
But despite the possible increase in revenue, Ford expects its profit to fall in 2018.
But Ford's earnings are coming under pressure
Shanks said that Ford expects its adjusted earnings per share (EPS) to come in between $1.45 and $1.70 in 2018. That's down from the $1.78 it made in 2017. The decline will be due to a few factors, Shanks said:
- Higher costs for key commodities, such as steel and aluminum, and unfavorable exchange-rate movements. Shanks estimates that those will raise Ford's costs by about $1.6 billion from 2017.
- Rising interest rates will put pressure on Ford Credit's margins, driving its profit somewhat lower.
- Increased spending on autonomous-vehicle development and Ford's future-mobility business initiatives.
On the other hand, Shanks said, Ford is likely to sell a larger percentage of SUVs and trucks in 2018, thus improving its "mix" and net pricing. But on balance, it expects its adjusted EPS and profit margin to be lower in 2018 than they were in 2017.
Shanks said that Ford thinks it can offset at least some of the effects of exchange-rate movements and rising commodity costs. But it isn't sure if it will be able to offset all of them, hence the range in its adjusted-EPS guidance. And he emphasized that these cost pressures aren't new.
"The changes in commodity prices and exchange rates that we've seen over the last several years have had a material effect on the business," Shanks said.
While presenting that slide, Shanks emphasized that Ford's management team isn't using these factors to make excuses for Ford's lackluster bottom-line performance since 2015. Ford's 2015 profit was a record, but it declined in 2016 and again in 2017 despite strong sales in a market that seemed to favor Ford's most profitable products.
Before going further, let me be very clear. The bottom line results are the bottom line results, and we, as the management team, should be measured by the bottom line results. So the purpose of this slide is not to distract from the bottom line results. We're only providing this because it has been a material impact in a relatively short period of time on factors over which we have little control in that period of time.
It's also helpful, I think, in understanding the trend of the results and to the extent to which we've been able to deliver what are effectively flattish results while also absorbing increasing investments in all the areas of transformation that we've been working on.
These ongoing cost pressures serve to underscore the urgency of Ford's effort to contain rising costs and improve its financial "fitness," Shanks said.
A few more details, and the big takeaway
Shanks expanded on Ford's 2018 guidance during the earnings call, adding a few more details:
- Companywide operating cash flow will be positive in 2018, but lower than Ford's 2017 result ($3.78 billion).
- Adjusted pre-tax profit from Ford's automotive business will be flat to lower versus its 2017 result ($8.1 billion).
- Ford's mobility business will post a higher loss in 2018 than the roughly $300 million it lost in 2017, as Ford's spending on future-tech ramps up.
- Ford's capital spending will be about $7.5 billion in 2018, up from $7 billion in 2017.
Shanks emphasized that Ford does expect to return to a profit-growth trajectory in a couple of years, but the company has a lot of work to do to get there.
Long story short, the takeaway for Ford investors is this: 2018 won't be great, but -- assuming the economy cooperates -- it should set Ford up for some nice improvements in the years to follow.