Ford Warns Of Lower Second Half Earnings

Ford shocked the automotive industry and investors late last week when it said it expects sales and profits to plateau or decline in the second half of 2016. The news was especially unexpected considering CEO Mark Fields had nothing but positive things to say about the company’s financial future earlier this year.

Ford C Max

Ford executives said the company is spending more than anticipated on incentives as U.S. vehicle demand softens, generating less revenue than expected in China, and facing at least a $1 billion hit over the next three years from the Brexit vote in Europe.

Adam Jonas, a well regarded automotive industry analyst at Morgan Stanley called the abrupt shift in attitude a possible “watershed” moment for the industry. Until know, others in the industry have been dismissing  concerns about a levcling off of U.S. sales and rising discounts.

“We remain committed to our 2016 guidance, but we’re facing risks to achieving that,” Fields said after Ford posted a 9 percent decline in second-quarter net income. “We’re seeing more pressure throughout the business for the remainder of this year, so as a result, we’re calling for the second half of this year, and particularly the third quarter, to be much weaker than normal.”

The comments were a significant departure from Ford’s confidence in April, when the company posted its highest quarterly pretax profit ever. “Essentially everything has improved,” CFO Bob Shanks said April 28. “We’re reconfirming all of our guidance to be as good as if not better than the record year that we had in 2015.”

Among the biggest surprises since April was the Brexit vote June 23, in which the United Kingdom elected to leave the European Union. Ford now says a weaker U.K. market could cost the company $200 million this year and as much as $500 million in each of the following two years.

One thing that has to make environmentalists unhappy is that Ford has recently spent more than $2 billion in incentives, much of that in order to move its popular F-150 pickup trucks. Among the Big 3, pickups are traditionally high profit vehicles but the struggle to maintain market share has forced Ford and others to offer larger incentive packages.

There is a huge debate whether manufacturers build more trucks because of customer demand or because the companies market them so fiercely. If Ford is spending $2.2 billion to get people to buy pickup trucks, that seems to settle that debate. At a time when average fuel economy is down and warnings about global warming are ramping up, those concerned with the environment have more reason than ever to believe the big manufacturers are merely paying lip service to environmental concerns while working overtime to promote their biggest, thirstiest, and most profitable offerings.

U.S. sales of its best selling and hugely profitable F series trucks were up 11 percent in the first half, including a 29 percent surge in June amid an aggressive Chevrolet ad campaign showing the bed of Ford’s aluminum-bodied F-150 pickup being gashed by a toolbox and a load of landscaping blocks.  So much for running down the competition. Chevrolet’s advertising appears to have provided Ford with a major boost in sales. And to think some ad agency actually got paid to create that ad campaign. Worst of all, some highly paid GM execs actually signed off on the it. Nice work all around, fellas!

“The competitive environment has increased as growth has slowed,” Fields said. “The bottom line is that we’ve seen a tougher pricing environment this [second] quarter, and we will face one going forward.”

“They’ve just got a lot of obstacles in front of them all at the same time,” said David Whiston, an analyst with Morningstar. “It’s not like we’re on the verge of a recession, but the market wants to see growth, and they’re not seeing it. There was already a lot of negative market sentiment around auto stocks, so Ford’s news just gives more fuel to the fire.”

AutoNation Inc. CEO Mike Jackson criticized Ford during an earnings call on Friday for unreasonable stair-step incentive targets, saying the retailer’s Ford stores had been given targets to increase sales in the third quarter by up to 40 percent. “Well, that’s just not going to happen,” Jackson said. “It’s totally unrealistic, and we’re not going to chase it. It is disruptive in the marketplace, and it causes irrational behavior, and there’s a price tag for that.”

Jackson allowed that the situation could improve in three months if Ford’s third-quarter targets clear inventory gluts while production is being cut. But the approach is still “not the best way to get there,” he said. Jackson added that the industry is at a “crucial point” with three major automakers — Ford, Nissan and Fiat Chrysler — operating massive stair-step programs.

Jonas, the Morgan Stanley analyst, said Ford’s about-face shows that some of the plans put into place under former CEO Alan Mulally are backfiring as the market shifts away from the small cars that were widely seen as the industry’s future only a few years ago.

“Ford’s prior leadership had made very large product and engineering bets on fuel efficiency across many areas including segments, weight reduction and engine downsizing,” Jonas wrote. “While such initiatives are an important part of the long-term strategic planning of any global auto firm, Ford appeared to pursue such efforts with a greater level of zeal. These efforts proved successful in terms of share and profit in a $100 [per barrel] oil environment but maybe present a pricing and market share challenge in the current environment given changing consumer preferences, however short term.”

Once again, the problems that flow from cheap oil and gas prices are roiling the markets. Those prices are unnaturally low thanks to government subsidies to the fossil fuel industries and economic models that do not require fossil fuels to pay for all the social costs associated with their use — things like rising sea levels, disappearing glaciers, warmer temperatures, and a sharp increase in disease and death among the world’s inhabitants.

What we have is not a level playing field but a market grossly distorted by artificial factors that strongly favor the use of fossil fuels over other alternatives. Only a carbon fee can restore sanity to how the market chooses its energy sources going forward.

Source: Automotive News


Steve Hanley

Closely following the transition from internal combustion to electricity. Whether it's cars, trucks, ships, or airplanes, sustainability is the key. Please follow me on Google + and Twitter.