Shares of Ford Motor Company (NYSE:F) dropped over 7% on Monday, after the company sharply lowered its guidance for the remainder of 2014 and beyond.
In a series of presentations for Ford investors, company executives on Monday lowered the company's 2014 profit forecast by about $1.5 billion. Ford also lowered its guidance for 2015 results in Europe: It had previously expected to post a profit, but is now saying that a loss is likely.
It was a startling blast of cold air for Ford investors, just three months into CEO Mark Fields' term. Is it time to think about selling Ford stock?
Some negative news in the short term
Fields said on Tuesday that Ford now expects its pre-tax profit for 2014 to fall between $6 billion and $7 billion. That's about $1.5 billion less than the expectations set during Ford's second-quarter earnings report in July.
Why the change? There are a few factors at work. First, Ford expects "warranty and recall costs" to be about $1 billion higher than expected. While repairs made under warranty on new Ford vehicles are at an all-time low this year, a rash of recalls has driven up costs. Ford has recalled 3.9 million vehicles so far in 2014.
The recall scandal at General Motors has prompted its rivals -- and U.S. regulators -- to take a much closer look at potential quality issues, and to err on the side of ordering more recalls, sooner. Ford is no exception: Earlier this year, the company sharply increased the reserves held on its balance sheet in anticipation of future recalls.
Preparations for the launch of the all-new 2015 F-150 may also be weighing. In July, Ford posted a 11.6% operating margin in North America for the second quarter -- but noted at the time that its full-year margins in the region would be between 8% and 9%, due to the high costs of launching products like the all-new F-150 and Mustang. North America chief Joe Hinrichs said Monday that he expected Ford's North America operating margin to come in at the "low end" of that range for the full year.
Hinrichs also said that Ford's North America operating margin would be in the 8%-10% range over the next several years, a bit lower than the 10% that the company had previously targeted, as the costs of meeting fuel-economy mandates were likely to be higher than previously expected.
Ford also expects its European results to come in about $300 million worse than expected. Much of that is due to the deteriorating economic situation in Russia, where Ford has key factories and has made substantial investments in recent years. It now expects losses in Europe to total about $1.2 billion before taxes in 2014.
Ford also lowered its Europe guidance for 2015, a change that worried many investors. Ford has been saying for a while that it would return to profitability in Europe in 2015, but those Russian problems -- and worries about the slow recovery of Europe's new-vehicle market as a whole -- led Ford to say that it now expects to lose about $250 million in the region next year.
Ford also sharply lowered its full-year guidance for South America. In July, the company said it would break even or post a small loss for the year, but it's now expecting to lose $1 billion. Tougher-than-expected economic conditions in several key countries have led to a "substantial" reduction in new-vehicle sales across the industry. Ford is also anticipating some negative exchange-rate movements as local currencies continue to weaken.
That all adds up to more than $1.5 billion, but there's some good news: Ford's average transaction prices in North America have been better than expected, offsetting some of the damage.
Longer-term, the news is still good
That wasn't the only good news -- in fact, there are plenty of reasons to be optimistic about Ford's longer-term outlook.
First, despite the lowered guidance for Europe, the company's turnaround plan is still on track. A $250 million loss in 2015 would be disappointing, but it's still a huge improvement over the $1.75 billion loss in 2012 and the $1.6 billion Ford lost in Europe last year.
Second, Ford clarified its guidance for its Asia-Pacific division, and the news is good: It expects to earn about $700 million before taxes in 2014, up from $415 million in 2014. We knew that Ford's sales have been booming in China; Asia-Pacific chief Dave Schoch said on Monday that profitability has been strong, too.
And it's still expanding. Ford has opened or started construction on 10 new factories in the Asia-Pacific region since 2012; four -- two in India, two in China -- are expected to open next year. It expects further substantial growth, with strong profitability: Operating margins should be in the 12%-14% range by 2020, Schoch said.
Ford is also planning a $2.5 billion-plus expansion of its Lincoln luxury brand, an effort that is expected to make a substantial contribution to profits in several years. Sales of its newest products, the MKZ sedan and MKC crossover, have been strong, and average transaction prices on the MKZ are up sharply over those of the previous version.
Lincoln won't become a global brand overnight -- but China alone represents a significant opportunity. A major rollout of the Lincoln brand in China is beginning now. Ford expects Lincoln sales to rise to about 300,000 a year by 2020, from about 100,000 last year; China will represent a major portion of that increase.
The upshot: For long-term investors, there may be an opportunity
So is it time to sell Ford stock? Or maybe time to buy more, now that prices are down?
Let's back up and ask this question first: Why do we own Ford stock at all?
I've been a Ford shareholder since 2009. I originally bought because I saw the promise of Ford's North American turnaround -- but I've held on because Ford has been working to apply its proven, profitable approach to its operations in Europe and Asia.
The bull case for Ford goes like this: If Ford can hold its ground in the U.S., while making a major (profitable) expansion in Asia and turning Europe from losses to profits, its overall pre-tax profits should grow at a rate faster than the overall market over the next few years -- and its share price should follow.
As I see it, all of that is still true.
The story is still unfolding. It's still on track. In the near term, it might unfold a bit slower than we expected two months ago -- but we knew all along that it was going to be a bumpy ride in 2014, and it's not a surprise that the bumps might continue into next year. But now that we know a little more about Ford's plans for Asia and the prospects for Lincoln, Ford's future might be looking a little bit brighter, on balance, than it was two months ago.
I plan to hang on to my shares while the story unfolds, and to continue to collect Ford's solid (3.2% at current prices) dividend in the meantime.
What do you think? Is it time to sell the Blue Oval, is it time to buy more, or are you just going to hang on and wait? Scroll down to leave a comment with your thoughts.