Ford Motor Co. (F) released its first-quarter financials on Friday, and the iconic U.S. car manufacturer beat analyst expectations on nearly every front. Investors responded with enthusiasm, pushing the stock to its highest level in roughly nine months.
But considering the company’s recent history, Friday’s stellar earnings report looks like a very minor success. Shares of the 116-year-old automaker have been trending downward for most of the decade, having never regained the $19 level last seen all the way back in January 2011. This leaves investors wanting to know more about how the company plans stave off stiff competition from Tesla Inc. (TSLA) and General Motors Co. (GM) as well as resolve a brand-new investigation from the federal government.
Here’s a closer look at Ford’s latest round of financials – and the upcoming challenges that could derail the company’s continued strength.
The News
The company reported earnings per share (EPS) of $0.44, demolishing Wall Street’s forecast of $0.27 by 63% and marking slight year-over-year growth of 2.3% from $0.43 in Q1 2018. Analysts predicted that revenue strictly from the automotive business would come in at $37.08 billion. However, Ford raked in $37.2 billion from that sector, which surpassed the estimate by 0.3% but decreased 4.6% from $39 billion in the year-ago period. Overall revenue also dropped 3.9% from $41.96 billion in Q1 2018 to $40.34 billion.
Many noted the strong growth in Ford’s operating profit, which jumped 14% year-over-year and came in at $2.2 billion for the U.S. and Canadian markets. Despite fewer vehicles being sold in those regions during the January-March period, finance chief Bob Shanks attributed the climbing profits to consistently high sales for the F-Series pickup truck. He went on to note that overall he sees Ford having a much better year in 2019 than 2018, saying that “the ship is starting to turn after a lot of work on the fitness of the business, rethinking the product portfolio, working on a number of alliances.”
How Investors Reacted
Investors were galvanized by the company’s estimates-beating report and pushed the stock a whopping 10.7% higher from $9.40 at Thursday’s settlement to $10.41 by the closing bell Friday. That’s the highest close since July 25, 2018 when shares traded hands at $10.52. F stock was also the S&P 500’s top gainer, handily beating Align Technology Inc.’s (ALGN) and Capital One Financial Corp.’s (COF) 7.2% and 6.5% rallies, respectively.
More significantly, the Friday boost also pushed Ford’s market cap past Tesla’s for the first time in two years. At the close of trading, Ford was valued at $41.5 billion, while Tesla dropped to $40.6 billion due to TSLA’s 14% loss for the week.
The Bigger Picture
Ford has fallen on hard times during the 2010s, and those hard times may continue if new CEO Jim Hackett’s turnaround plan doesn’t address major problems both on the domestic and international fronts.
Upon taking the position in May 2017, Hackett teased vague details surrounding a specific turnaround plan he’s implementing to bring Ford back to global auto dominance. While he still hasn’t provided any specifics, investors and analysts alike believe it involves downsizing the company overall and exiting unprofitable businesses – two strategies that hardly constitute anything besides an average initiative to stimulate growth via expense cutting.
While Friday’s earnings report indicates this turnaround plan is coming to fruition, Hackett still has to deal with the problem of lagging sales in China, one of the world’s largest auto markets where the company struggles to incite demand for its signature line of trucks. Losses in the Chinese market climbed to $1.5 billion last year, and while they dropped from $150 million to $128 million in the first quarter, it still made up more than 61% of the total overseas losses of $196 million.
The second challenge also happens to be the newest: a Justice Department investigation into Ford’s method of certifying vehicles to meet federal emissions standards. While the company announced in February plans to look into the matter after employees raised concerns, it said Friday that outside regulators are also looking into the matter. And although Ford didn’t say which models in particular are being scrutinized, the ordeal could lead to massive state and federal fines at a time when the company is actively trying to reduce costs and build profitability.
Looking Ahead
With emissions being a hot-button topic following Volkswagen’s massive scandal in 2015 and 2016, it’s safe to assume the U.S. government won’t take it easy on Ford in the coming months. That could also mean volatility in the stock price, as news from the investigation continues to influence investors’ thinking.
Even with Ford trading at a low price, investors should wait a few more quarters to gauge the company’s continued growth before snatching up shares. Hackett’s ongoing turnaround plan will be key to any further gains in the stock price down the road.
