Shares of Ford Motor Company (F -3.20%) fell sharply on Thursday, after Ford reported second-quarter earnings that -- at least at first glance -- fell short of Wall Street's expectations. Ford's shares closed at $9.52 on Thursday, down 7.8% from Wednesday's closing price.
What happened? Ford reported its second-quarter earnings after the market closed on Wednesday, and it initially looked like a terrible result: Ford's net profit fell 86% from the second quarter of 2018, to just $150 million. A lot of that decline was due to one-time charges -- more on those in a moment -- but even without them, Ford's $0.28 per-share earnings fell short of Wall Street's $0.31 estimate.
Long story short: Ford "missed," and traders began selling.
But were things really that bad? I talked to CFO Tim Stone shortly after Ford's earnings were published, and he made a few key points in Ford's defense.
We knew that Ford's redesign would be expensive
First of all, Stone said, the big one-time charges were mostly related to restructuring efforts in Europe and South America, and they were right in line with Ford's guidance. Ford said last year that its ongoing global "redesign" effort would cost $11 billion over the next three to five years -- and it said that much of that total would be reported as one-time charges as they were taken over that period.
Incidentally, about $1 billion of Ford's second-quarter charges were "non-cash," meaning that they were accounting adjustments (write-offs, in other words) that didn't burn any current capital.
A revalued investment made a big difference
Second, Ford "missed" on adjusted earnings per share (EPS) because it marked down (in the accounting sense) the value of its investment in Pivotal Software, a cloud-software-consulting firm. Ford invested $182.2 million in Pivotal in 2016, and it marked down the value of that investment by $181 million in the second quarter.
As Stone pointed out during Ford's conference call, without that markdown, Ford would have beaten Wall Street's estimate by a penny:
On an adjusted basis, both company EBIT and margin for the quarter were flat at $1.7 billion and 4.3%, and EPS was $0.28. Excluding the Pivotal loss, adjusted EBIT would have been $1.8 billion, EBIT margin would have been 4.7%, and EPS would have been $0.32.
Under the hood, Ford's "redesign" is working
Third, and perhaps most importantly, Ford's ongoing "redesign" effort is starting to show results. They're not huge improvements, not yet, and you have to squint a bit to see them, but they're real. Consider:
- In Europe, an improved "mix" of products sold (more high-profit commercial vehicles and SUVs, fewer Fiestas) and stronger pricing helped Ford to $53 million profit. That's not much, but it's much better than the $73 million loss it posted in Europe in the second quarter of 2018.
- Ford has been struggling in China for a couple of years now, and it lost another $155 million in China in the second quarter. That's not good, but again, it's a lot better than the $483 million it lost in the year-ago period. Even better: Product mix, pricing, costs, and equity income from Ford's joint ventures with Chinese automakers all improved nicely year over year. Ford's not out of the woods yet in China, but the new management team that took over Ford's China operation early this year is clearly moving things in the right direction.
- In North America, sales volumes were down in part for a not-bad reason. Ford shut down the factory that makes its popular Explorer SUV for several weeks during the quarter to retool for the all-new 2020 model. The 2020 model is likely to be very profitable as the year goes on, but the shutdown meant that Ford lost about 72,000 units of production in the second quarter. And note that Ford was nearly able to offset the lost sales and the related cost increases (about $513 million of impact in total) with $445 million of year-over-year pricing improvements -- a nice bit of help from the ongoing redesign.
The upshot: Ford is making progress
Back in April, Ford's first-quarter result beat Wall Street's projected number, and the stock jumped. This time, we've seen the opposite scenario play out. The truth is, both quarters were in line with the expectations Ford set early in 2019, when it said that restructuring charges and new-product-launch effects would make for a bumpy ride after the first quarter.
Ford is doing pretty much what it told us it would do, and long-term investors shouldn't be surprised. I'm a long-term Ford investor, and if anything, I'm feeling reassured that Ford is executing on its long-term profit-growth plan. If so, the stock will be fine.