Is Ford Stock A Buy Going Into The Earnings?

Ford Motor Company (NYSE:F) stock is losing momentum going into the Q2 earnings.

Troubles of Ford Motor Company (NYSE:F) are not exactly hidden from the market. A peak in US auto sales and a rising threat of subprime crisis in auto loans have been a major drag on the company’s stock. Ford stock is down 5% YTD and more than 17% in the last one year. However, shares of the Detriot based auto major got a breather when the company reported better than expected sales number in June. Ford’s U.S. sales declined 5.1% during June, down to 227,979 total vehicles. The fact that 5% decline in sales was “better than expected” gives you an idea of how low the expectation is from the company.

Analysts expect a steep decline in Ford Q2 earnings.

Ford will report its Q2 2017 earnings on 26th of July. Analysts are expecting the company to report revenue of $37.13 billion, marginally higher than $36.93 billion the company had reported in the same quarter last year. On the earnings side, Ford is expected to report an EPS of $0.43 compared to an EPS of $0.52 the company had reported in the year ago quarter. This represents a decline of over 17%.

Earlier Ford had warned that its adjusted pre-tax income will take a hit this year. The company expects its 2017 adjusted pre-tax income to come in at about $9 billion, down about $1.4 billion from the $10.4 billion it had earned in 2016. In the first quarter, the company had reported a fall of $1.6 billion in the adjusted pre-tax income, which is higher than the company’s expected decline this quarter. This means that the earnings for this quarter could be better than what is expected by the market. The company has a mixed earnings history in the last four quarters, missing in two while beating in the other two.

Rising incentives are impacting the bottom lines of auto companies.

The overall prognosis for the auto sector as a whole has not been good. The industry is struggling from peaking demand for vehicles in the U.S as well as rising delinquencies in the subprime auto loans. In April, Deutsche Bank AG had warned about the triple threat facing the auto segment. The firm had warned that the industry faces risks “from rising rates, rising negative equity in vehicle loans and used vehicle-price deflation. This could lead to deteriorating affordability, delayed trade-in cycles, consumer shifts from new to used, diminishing credit availability and deteriorating mix/pricing.” This year, the industry witnessed one of the weakest first half sales in the last few years.

To fight this slowdown, firms have been trying to lure customers by providing higher incentives. Total incentive spending in the marketplace has risen to a record $25.2 billion through June, up 11.7% or $2.6 billion from the last year. On a per unit basis, spending for the average new vehicle through June was $3,770, up $416 from a year ago. The rising incentives have been hurting companies bottom lines and balance sheets. This is one of the reasons why analysts are expecting such a steep fall in Ford Motor’s profits.

Rising recalls have also impacted Ford’s bottom line. The company’s bottom line could come under further pressure after the United States asked the company to recall over 2.5 million vehicles. These vehicles come with Takata air-bag inflators that the Japanese auto supplier declared defective last week. The Detroit based auto maker has filed a petition to avoid this recall. Margins could be further impacted if the Trump administration goes ahead with its plan to impose tariffs on steel imports. American Automotive Policy Council which includes Ford has issued a strong statement against the imposition of tariffs.

Will the leadership shake up help?

The poor performance over the last two years resulted in a change in leadership, with Jim Hackett replacing Mark Fields as the new CEO of the company in May. The leadership change indicates where Ford expects its future to be. Jim Hackett has been leading the company’s smart mobility division. The auto industry is currently going through some major upheavals thanks to the rise of self-driving technology, electric cars and ride sharing companies. Every auto maker is making a huge investment in the autonomous driving technology which is likely to be the main growth driver in the future.  And Ford is not behind. The company is investing huge resources in the self-driving segment. An independent research report from Navigant shows Ford at the head of the pack when it comes to self-driving tech. According to Navigant’s rating system, Ford’s edge on Strategy gives it the overall claim to the top spot.

However, Ford still has a long way to go. The sales are likely to remain muted even in the next year. The better than expected sales report for June has led to some optimism in the stock. Ford stock had gained more than 5% from the end of June. But the stock has given up some of those gains in the last two trading sessions. Ford stock is losing momentum going into the Wednesday earnings report. Ford stock is likely to remain under pressure for quite some time. However, if you are an income investor, the company’s 5.2% dividend yield does make it a good buy. If you are looking to buy auto stocks which have outperformed the market, check out our top auto stock picks, which has beaten the S&P 500 by 227.6%.

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