Commentary

Ford Sees A Slowdown Coming

Ford yesterday not only revealed that its year-over-year sales had declined 9% in Q2 2016, it also sent a chill through both Wall St. and Main St. by suggesting that the good economic times are in the exit lane due, in part, to Brexit. 

“Ford is considering closing plants in the U.K. and across Europe in response to Britain’s vote to leave the E.U., as it forecast a $1 billion hit to its business over the next two years,” writes Peter Campbell for Financial Times.

But macroeconomic trends across the globe, and weakening demand in the U.S., are also in play.

“The competitive environment has increased as demand has slowed,” president and CEO Mark Fields said during a conference call with investors following the release of its earnings. “…The bottom line is that we've seen a tougher pricing environment this quarter and we will face one going forward.

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“The growth is over,” Ford CFO Robert Shanks tells Reuters’ Bernie Woodall and Joseph White. Shanks predicts U.S. light vehicle sales will fall in 2016 from the record of 17.47 million last year, and fall again in 2017.

“Pent-up demand built during the last recession has been satisfied, and lower used car prices are drawing some buyers away from new vehicles, he said, adding however, ‘We’re not talking about a collapse.’”

Nonetheless, Ford shares were down 8% yesterday, Fiat Chrysler dropped 5% and General Motors fell 3%. 

Not that Ford’s news was all that bad in and of itself. In fact, despite the glum prognosis, the online earnings report prominently features a head shot of a beaming Fields next to the quote: “We delivered another strong quarter — one of our best second quarters ever — and record pre-tax profits for the first half of this year. We remain committed to delivering another full year of strong profitability, even as we address some new risks and market challenges around the world.”

Indeed, “a $2-billion profit for three months is nothing to laugh at, but Ford executives Thursday sounded as if they had been debriefed by a miner's canary chirping about feeling light-headed underground,” is Greg Gardner’s lede in the Detroit Free Press.

The actual warning signs include more incentives in the marketplace nudging fence sitters to buy, as well as a slightly higher default rate on loans through Ford Credit. “The unanswered two-part question: How specific are these factors to Ford? And how much will they impact the industry overall?” Gardner posits.

Indeed, “the cautious tone contrasts with that of GM, which lifted its overall full-year guidance last week despite Brexit concerns, and continues to forecast an equal-to-better performance for the U.S. market in 2016 compared with 2015,” Christina Rogers writes in the Wall Street Journal.

And, she points out, “altogether, GM, Ford and Fiat Chrysler earned about $7.7 billion in North America in the April-through-June period, one of the most profitable periods in Detroit’s automaking history and the equivalent of more than $3,000 wholesale profit for each vehicle.”

“They definitely have some challenges, but it’s not disastrous,” Autotrader.com senior analyst Michelle Krebs tells the Detroit News’ Michael Martinez. “Sales have peaked, but the sky’s not falling; it’s still going to be a very good profit-sharing year.”

But Ford “suffered a $60 million hit due to the collapse in the British pound and warned of full-year losses of $200 million related to a ‘weaker industry’ in the U.K.,” Matt Egan points out for CNN Money. “Britain is Ford's second biggest market and makes up about 30% of European sales. Ford anticipates losses of $400 million to $500 million a year after 2016 due to Brexit.”

“Elsewhere in the world, Ford saw continued pressures in South America, improved profits in Europe and lower profits in Asia, mostly due to increased competition from rapidly improving Chinese automakers,” reports Joann Muller for Forbes.

“The U.S. auto market is probably leveling out,” Morningstar analyst David Whiston tells Bloomberg’s Keith Naughton, but he believes Ford shares are undervalued and rates it the equivalent of a buy despite its Brexit problems and “launch costs for Super Duty in the second half that will hurt North America.”

Ford actually took the wraps off said 2017 F-series Super Duty in Denver this week. The redesign, which features an aluminum alloy body — and 10 cup holders throughout the cab — is the first since the series was launched in 1999, Tracy M. Cook reports for the Denver Post. It’s built to tow and starts at $32,500. The F-450 Platinum, at $77,000, has massaging seats.

Overall, Ford trucks and SUVs remain very popular with consumers, particularly as gasoline prices remain low. Says Morningstar’s Whiston: “The risk is when does all that all come crashing down. I’m not worried about it being imminent.” 

 
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