For those of you investors who spent today working on your own projects, you likely missed Ford Motor Company's (NYSE:F) investor day presentation, and thus you missed the reason behind the automaker's nearly 8% drop in stock price. As usual, there's a mix of good and bad news for both short- and long-term investors. Here are some of the major drivers behind Ford's stock price drop today, and what it means for the rest of 2014.
What's the big deal?
One of the biggest disappointments during Ford's investor day presentation was certainly the updated guidance coming out of its European operations. Just last quarter Ford surprised investors with a quarterly profit in Europe, which seemed to cement its guidance for the company to break even in Europe for 2015, a move that will eventually save Ford billions in net income.
Unfortunately, breaking even in Europe is no longer the case, due to unforeseen issues in Russia. Russia's geopolitical situation has slowed GDP growth substantially, to less than 1%, according to Ford. Industry sales are down 15% compared to last year, and Russia's ruble devaluation is also negatively affecting the folks at the Blue Oval.
Originally, Ford expected to lose roughly $1 billion in Europe this year, with many analysts thinking that loss could actually check in under that guidance. That thinking has since reversed, and as of today management believes Ford's European operations will lose roughly $1.2 billion for 2014. Furthermore, rather than breaking even in the region next year, Ford now expects to lose roughly $250 million in 2015.
Ford's overseas pain doesn't end in Europe, though, and South America is also expected to bring in larger than expected losses as well. Ford's pain in South America continues as the region has had slower GDP growth with a slight recession expected in major markets in 2014 and 2015, before recovering. Also, high inflation and currency weakness will cause significant adjustments in Venezuela and Argentina. Ford now expects to incur losses of $1 billion in its South American operations for 2014.
On top of Europe and South America operations turning out to be worse than anticipated, Ford's warranty costs also ballooned more than expected. All in all, with updated guidance on those key factors, Ford's 2014 pre-tax profit estimates are going to be substantially lower than anticipated at the beginning of this year.
This is certainly a devastating blow to Ford investors, and quickly sent the stock nearly 8% lower during the presentation. However, all is not lost for long-term investors who believe in Ford's plan -- a plan that has turned the company around from losing more than $30 billion between 2006 and 2008 to recording $8.6 billion in pre-tax profit last year, one of the most profitable years in its history.
The upshot remains
While the updated profitability guidance certainly was disappointing, there are still a lot of positive aspects of Ford's business. Despite gloomier projections for profits overseas, Ford's main profit driver, North America, is still churning out cash for the automaker in the short and long term -- a comforting prospect, to be sure.
Also, sales in China are booming, and Ford's Asia-Pacific segment is expected to record $700 million in pre-tax profit this year and account for nearly 40% of company revenue by 2020. That's a very positive development for investors who are worried that Ford is too dependent on North America for success. Ford's global growth prospects are still intact and the company expects to grow its global sales volume between 45% and 55% by 2020 -- from 6.2 million vehicle sales in 2013 to roughly 9.4 million in 2020.
Despite warranty costs rising and weighing down profitability in the near term, investors should feel confident that Ford's quality is improving and that issues per thousand vehicles are at a record low -- something that bodes well for Ford's future.
Investors should also keep in mind that Ford has been diligently paying down its automotive debt and expects its entire operation to be breakeven at two-thirds of its current wholesale volume over the next few years -- meaning investing in Ford will be far less risky over the long term, even with a potential down cycle in the future.
This is certainly a bump in the road for Ford investors who expected Europe and South America to weigh less on this year's profitability than is now expected. However, despite extended losses in Europe, Ford still believes its overall company pre-tax profits will rebound in 2015 to between $8.5 billion and $9.5 billion, which would be one of Ford's best years on record. In my opinion, as a long-term investor who believes in Ford's business prospects and global growth strategy, today's 8% drop and reduced guidance for 2014 doesn't matter as long as the company can execute in 2015 and hit the previously mentioned pre-tax profit estimate between $8.5 billion and $9.5 billion.