Ford Beats 2Q17 EPS View on Lower Tax Rates

Ford Beats 2Q17 EPS View on Lower Tax Rates

Despite reporting better than anticipated fiscal 2017 second-quarter results, the stock of Ford Motor Company (NYSE: F) has declined marginally to trade at about $11. The overall weakness in the US automobile market, which contributes a major share of profit to Ford, is primarily responsible for the poor performance of the stock. Additionally, the facts provided underneath indicates that the stock would remain bearish in the short-term.

The Michigan-based company reported second-quarter 2017 GAAP net income of $2.04 billion, or $0.51 per share, on revenues of $39.85 billion, compared with a GAAP net income of $1.97 billion, or $0.49 per share, on revenues of $39.49 billion in the prior year’s similar period. Analysts had expected Ford to report revenues of $37.28 billion. Excluding income tax provisions, among others, 2Q17 adjusted earnings of $2.244 billion, or $0.56 per share, were greater than FactSet Consensus of $0.43 per share.

Segment wise, Automotive revenues almost remained flat at $37.113 billion in the June quarter. Financial services revenue increased more than $150 million to $2.738 billion.

Ford stated that it anticipates FY17 adjusted earnings to be between $1.65 and $1.85 per share. The Street is forecasting earnings of $1.51 per share. If Ford ends fiscal 2017 at the top end of the EPS range, the pretax profit would still be under the $9 billion forecast earlier. The FY17 earnings guidance is roughly on par with FY16 performance. However, Ford stated that it anticipates operating margin and cash flow to be lower than last year.

The North American region contributed to most of the profit. Put together, other regions reported a break even. In the US, pre-tax profit of Ford Credit was up 55% y-o-y to $619 million. With a 7% y-o-y gain, Ford’s F-Series (trucks) reported its second best quarterly sales performance since 2001. Luxurious brand Lincoln recorded strong second-quarterly sales in both the US and China. As many as 29,000 Lincoln brand vehicles were sold in the US. It is the best performance in a decade. In China, Lincoln brand recorded a growth of 84% y-o-y growth in June.

Ford acknowledged that lower tax rates of 15% paid a crucial part in reporting strong earnings. Last year, the tax rate was about 31.9%. In 2019, the company is expected to pay a tax rate of about 30%.

After taking over the position of CEO in May, Jim Hackett is reportedly looking for ways to improve revenue. According to Barclays analyst Brian Johnson, the market is waiting for Hackett to present the updated strategy. If a good detailed plan to improve capital efficiency is presented, then it would lure investors. Until then, investors would be waiting on the sidelines. Thus, flat revenues, overall weakness in the US automobile market, and lacklustre guidance would keep the stock bearish in the short term.

As the chart indicates, the stock has broken the support at 11.20. Furthermore, the stochastic oscillator is in the bearish zone. The next major support exists only at 10.70. Thus, we foresee a decline in the share price of Ford Motors.

Ford - Technical Analysis - 8th August 2017

Since the odds favour a decline, we wish to place a bet on a put option valid for a period of one week. The contract would be taken when the stock trades near $11 in the NYSE.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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