It’s hard not to like Ford (F). The company managed to survive the Financial Crisis without needing incremental capital from the US government, unlike its now infamous peer, General Motors (GM). Ford is also fresh off a near-flawlessly executed turnaround with former Boeing executive Alan Mulally leaving the automaker, but not before getting it back on track. The company’s third-quarter results represented its 21st consecutive profitable quarter. Current CEO Mark Fields appears up for the challenge.
However, profits didn’t move in the right direction during the quarter. Pre-tax profit fell to $1.2 billion (down from $2.6 billion), while net income fell to $835 million (down from $1.27 billion), due in large part to higher warranty costs, adverse exchange impacts (mainly in South America), and charges related to its European transformational plan. Pre-tax results were lower in all automotive segments, with the exception of the Middle East & Africa division.
Ford’s wholesale volume and company revenue declined year-over-year by 3% and 2%, respectively. Automotive operating cash flow was a little light, coming in at negative $700 million, but the firm continues to make progress across myriad markets. Its share was higher in Europe, and it posted record share in the Asia Pacific and China. If you recall, Ford’s expansion in Asia is a key source of upside, something for which we think the market is not giving it enough credit. Automotive gross cash was $22.8 billion at the end of the third quarter, more than double its debt load $7.9 billion.
The automaker’s guidance was unchanged from its September 29 Investor Day, and the “unprecedented cadence of new products continues (with) all launches on track, including the all-new F-150.” Management is targeting 2014 pre-tax profit guidance of about $6 billion, excluding special items, and improved performance in 2015. On the basis of the weak macroeconomic backdrop and headwinds in Europe and South America, execution of its ‘One Ford’ plan will be critical to driving profit expansion and improving automotive operating cash flow, which was a disappointment in the third quarter.
We removed the company from the Best Ideas portfolio, but we’re sticking with the firm’s long-term cash-flow-derived intrinsic value estimate of $21 per share. Its equity price could face pressure in the event of global cyclicals weakness, but it remains one of the best ideas within the automotive space, in our view. The firm is no longer included in the newsletter portfolios.