Detroit's two largest automakers, fierce rivals General Motors and Ford Motor Company (NYSE: F), have many things in common. Both make a vast majority of their profits in North America and do so mainly by selling highly profitable and popular SUVs and full-size trucks.
Because of those similarities, investors expected Ford to follow in the footsteps of General Motors' impressive third-quarter performance, which sent its stock up about 5% higher after it reported earnings last week. Unfortunately, Ford fell slightly short of those lofty expectations, even though its third quarter was extremely strong.
Let's dig into the numbers, the reason behind Ford's slight miss, and a couple of takeaways for investors.
By the numbers
Ford checked in with a pre-tax profit of $2.7 billion in the third quarter, which is $1.5 billion higher than last year's third-quarter results. That equated to earnings per share of $0.45, excluding special items, which was a penny short of analyst estimates but $0.21 per share higher than last year's third-quarter performance. That penny shortfall was largely due to Wall Street expecting a tax rate of 32%, while Ford's actually ended up being 33%.
Despite the slight EPS miss, it was an extremely strong quarter for Ford: Net income checked in $1.1 billion higher, at $1.9 billion, driven by North America's best quarterly automotive profit ever. Ford's automotive-operating related cash flow reached $2.8 billion in the third quarter, which was a $3.5 billion gain compared to the same quarter last year.
Sit down, Donald
An entertaining takeaway for investors came when Ford CEO Mark Fields was asked about Donald Trump's criticism of Ford investing in its Mexico operations. Trump has spent roughly six months criticizing Ford's move to invest about $2.5 billion in its Mexico operations. Fields' response was pretty strong.
"We deal with the facts -- and facts are stubborn things -- and at Ford we're proud of the facts, and unfortunately we suspect the facts are getting lost in the politics," Fields told reporters and analysts. "Facts don't cease to exist because they're ignored."
To put more context around the above quote, Fields noted that Ford has invested more than $10 billion in the U.S. since 2011 and added more than 25,000 U.S. employees during that time. In fact, 80% of Ford's investments in all of North America are here in the U.S., and roughly 97% of engineering is done here in the states. Automakers are global corporations, however, and as such it makes good business sense to invest in the markets where business is done: Ford has been in Mexico for 90 years.
With Fields' comments on the subject, investors can take a step back from the silly headlines fueled by Trump.
While most investors will hear about the strong profitability of Ford's operations in North America -- and obviously, that's critical for overall success at Ford -- it's worth pointing out that Ford Credit continued to have another strong quarterly performance.
Consider that Ford Credit checked in with a third-quarter pre-tax profit of $541 million and net income of $365 million; that essentially makes it more important to the bottom line than Ford's operations in South America, Europe, and Asia-Pacific, which respectively posted pre-tax losses of $163 million and $182 million, and a slight profit of $20 million.
Overall, it was as good a third quarter for Ford Credit as it was for Ford overall. Ford Credit checked in with receivables up $9 billion from the end of 2014, and its portfolio continues to perform well, with losses near historical lows.
All in all, Ford expects the fourth-quarter profitability to be slightly negatively affected by higher seasonal costs and signing bonuses with a new labor deal, but management also expects to finish 2015 with pre-tax profits between $8.5 billion and $9.5 billion, excluding special items, with higher revenue, operating margin, and operating-related cash flow compared to last year. It was a very strong third quarter, and the current 4% sell-off seems like a considerable overreaction.