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It looks ugly at first glance, but Ford's second-quarter result was actually pretty decent.
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Shares of Ford Motor Company (F 0.02%) 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.
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.
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.
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:
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.