Ford Motor Co

Dec 4, 2017

Ford Motor Co. (F-NYSE) $12.63

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 3Q17 Earnings Update.

Previous Edition: Flash Update; 3Q17 Earnings, Oct 26, 2017.

Brokers’ Recommendations: Neutral: 75% (12 firms); Positive: 18.8% (3); Negative: 6.2% (1) Prev. Ed.: 12; 3; 1

Brokers’ Target Price: $13.33 (↑ $0.29 from last edition; 12 firms) Brokers’ Avg. Expected Return: 5.5%

Portfolio Manager Executive Summary

Ford Motor Company (F) is a global producer of trucks and automobiles as well as a financial services and mobility company. It operates under three segments: Automotive, Financial Services and All Other. Ford’s core and affiliated automotive brands include Ford and Lincoln. Its automotive-related services include Ford Credit. Ford Smart Mobility designs, builds, grows and invests in mobility services.

Of the 16 firms in the Zacks Digest Group covering the stock, 12 provided neutral ratings, three assigned positive ratings and one rendered a negative rating. Target prices were provided by 12 of these firms.

Neutral or equivalent outlook (75%; 12/16 firms): These firms are hopeful about Ford’s ability to boost profits. They expect the automaker to gain from its investments in infrastructure, border adjustment tax reform and exposure to the Russian economy. However, they are concerned about the competitive and cyclical nature of the automotive industry and stiff competition from other American as well as Japanese, Korean and European automakers. Further, Ford’s market share expansion has been affected by the ongoing weakness in South American markets as well as its late entry into the world’s largest automobile market, China. These firms expect Ford to benefit from its investments in new product launches. They believe that the automaker will win market share on the back of its refreshed product portfolio. However, they remain concerned about deteriorating demand in South America. Headwinds related to Brexit and the competitive environment in North America and China also pose concerns.

Positive or equivalent outlook (18.8%; 3/16 firms): The bullish firms believe that Ford will benefit from strong product mix, higher volume, lower costs, de-risked balance sheet, product launches, the success of its One Ford plan, operational restructuring and rising sales in North America. Additionally, the company is positioned to benefit from the rising demand for the new F-150 vehicle. The firms are also optimistic about Ford’s quality improvement initiatives and ability to generate profits even during a downturn. They consider Ford to be in a more advantageous position than its peers due to its innovative products, which offer updated technologies and better fuel efficiency. Ford also strives to bring parity between inventory and market demand in order to drive profitable growth.

© Copyright 2017, Zacks Investment Research. All Rights Reserved. Negative or equivalent outlook (6.2%; 1/16 firms): The bearish firms are concerned about the highly competitive nature of the automobile industry, costs related to product launches, higher taxes and the company’s limited share in the Chinese auto market. Further, Ford has been recalling vehicles frequently to fix safety issues, which leads to higher expenses. Dec 4, 2017

Overview

Michigan-based Ford Motor Company is an automotive, financial services, and mobility company with operations in the United States and across the world. The company manufactures and distributes automobiles in 200 markets across six continents.

Ford is one of the largest automobile producers in the world and the second leading in the United States, and a top supplier of auto financing through its subsidiary, Ford Motor Credit. Although the primary selling ground of Ford is the United States, other major markets include Europe, South America and the Asia Pacific.

Ford has three reportable segments – Automotive, Financial Services and All Other. The Automotive segment covers five regional business units: North America, South America, Europe, Middle East & Africa and Asia Pacific. The Automotive segment (which generated roughly 93.2% of the company’s total revenue in 2016) is engaged in the design, development, manufacture, sale and service of cars and trucks as well as service parts, and accessories.

The Financial Services segment (6.8%) deals with vehicle-related financing and leasing activities at Ford Credit.

All Other consists of the Central Treasury Operations (formerly Other Automotive) and Ford Smart Mobility LLC operating segments. The Central Treasury Operations is primarily involved in decision making for investments, risk management activities, and providing financing for the Automotive segment. Ford Smart Mobility is a new subsidiary that was established by Ford to design, build, grow, and invest in emerging mobility services.

The analysts identified the following factors for evaluating the investment merits of Ford: Key Positive Arguments Key Negative Arguments . Higher Industry Volumes: The company’s . Increased Competition: Ford faces rising results are benefiting from the rise in industry competition from foreign companies as they sales volumes in the North America. increase exports to the United Stated and . Smaller Vehicles: Ford plans to focus on expand production capacity. smaller and more fuel-efficient vehicles that . Unfavorable Currency Translation: will result in a more balanced global portfolio. Unfavorable currency translation remains a consistent problem for the company. . Brexit Impact: Negative impact from Brexit could hurt employment rates and purchasing power, thus reducing vehicle sales.

Further information on the company is available at http://www.ford.com/ .

Note: The company’s fiscal year ends on Dec 31. Dec 4, 2017

Zacks Investment Research Page 2 www.zackspro.com Long-Term Growth

Ford’s accelerated product transformation plan “One Ford” is positively influencing the company. The primary mission is to produce common vehicle models for all of its global segments. Another key objective of the plan is to shift focus from trucks to small cars and deliver more vehicles from fewer core platforms.

Moreover, the company expects to meet the challenges in Europe and South America by executing its One Ford plan. It has already renewed the majority of its product line-up albeit with a few discontinuations. Also, it has planned several launches under the program. Ford launched 16 vehicles globally in 2015 and 11 in 2016. The automaker will also open new dealerships in the Middle East & Africa region over the next two years.

The automaker will also add more electrified products under the Ford and Lincoln brands. It aims to roll out 25 new models in Europe between Sep 2012 and Sep 2017 to drive car sales in the continent.

In Dec 2015, Ford announced that it will invest $4.5 billion toward its electrified vehicles goal by 2020. With this, the company will expand its offering of hybrids and electric vehicles. Ford plans to introduce 13 new electrified vehicles by 2020. The automaker also expects that 40% of its portfolio will have electric versions by then.

Ford is rapidly working on bringing autonomous vehicle technology to the market. The company will add several driver-assist technologies to its vehicles over the next five years. In Dec 2016, Ford launched the next-generation Fusion Hybrid autonomous development vehicle. In 2016, Ford tripled its fleet of fully autonomous Ford Fusion Hybrid test vehicles to 30. The fleet will be tripled again in 2017. Ford’s fleet of autonomous vehicles is being tested on the roads in California, Arizona and Michigan. The automaker will also use a new-generation sensor technology in these vehicles. Ford plans to launch a fully autonomous Society of Automotive Engineers-rated (SAE) level 4-capable vehicle by 2021. The vehicle will be produced in high volume and will be aimed at ride-hailing and ride-sharing services. To achieve this target, Ford is investing in or collaborating with four startups, namely Velodyne, SAIPS, Nirenberg Neuroscience LLC and Civil Maps.

In 2014, Ford created a new business unit, Ford Middle East & Africa, to capitalize on the growing importance of the Middle East and African markets. To strengthen its foothold in this lucrative market, Ford plans to launch new vehicles in these regions. The company also intends to make customer support and car parts easily available there. The automaker plans to take advantage of the growing market to increase its sales in the small, mid-size and large vehicle segments.

In the long run, Ford expects all automotive business units and Ford Credit to be profitable. The company anticipates annual global sales to increase 45%–55% to nearly 9.4 million by 2020. Automotive operating margin is expected to improve to 8% by 2020, while the company aims to achieve automotive operating margin of 8%–9% in the long term. The company expects that the total Middle East & Africa car market will improve by 40% to 5.5 million vehicles by 2020, and its sales in the region will surpass the industry sales growth. Ford is also targeting positive operating-related cash flow, capital spending of about $9 billion per annum and investment grade profile of “A” by 2020. Further, the company aims to sell 300,000 Lincoln vehicles, backed by the brand’s launch in China and improved market coverage. Ford also plans to launch two Lincoln vehicles, apart from the MKZ and MKC by 2020.

Ford projects compact car sales in India to increase to 1.6 million vehicles in 2018 from 1.1 million units in 2014. The company expects to benefit from its focus on manufacturing operations in India.

Zacks Investment Research Page 3 www.zackspro.com The bullish firms believe that Ford’s balance sheet and earnings will improve in the long run. The firms with a neutral outlook believe that Ford’s market share growth will be limited in the long term due to stiff competition from the United States, Japanese and European automakers. Dec 4, 2017

Target Price/Valuation

Provided below is a summary of target price/valuation as compiled by Zacks Digest:

Rating Distribution Positive 18.8% Neutral 75% Negative 6.2% Avg. Target Price $13.33 Digest High $17 Digest Low $10 ↑ No. of Analysts with Target Price/Total 12↓/16

Risks to the target price include unfavorable pricing changes, the highly cyclical nature of the global aut o industry, slow recovery of the U.S. economy, increase in interest rates, inefficiency of dealership netw orks, loss of market share to competitors as well as market shift from the sales of trucks, SUVs or other more profitable vehicles to less profitable ones.

Recent Events

On Oct 26, 2017, Ford announced its 3Q17 earnings results. The highlights are as follows:

 Total revenues (GAAP) were $36.5 billion, increasing $0.6 billion from 3Q16 figure.  Adjusted pre-tax profit was $2 billion, up $0.6 billion from the year-ago quarter.  Adjusted earnings per share (EPS) were 43 cents in 3Q17, reflecting an increase of 17 cents from 3Q16.

Revenue

Revenues (GAAP) in 3Q17 increased $0.6 billion year over year (y/y) to $36.5 billion.

Segment Details

Ford Automotive: Ford logged Automotive revenues of $33.6 billion in 3Q17, which surpassed the Zacks Consensus Estimate of $32.9 billion. Revenues were higher by $0.3 billion on a year-over-year basis. Wholesale volumes decreased 26,000 units to 1.5 million units.

In North America, revenues decreased $0.9 billion to $20.9 billion. Wholesale volumes declined 5.4% year over year to 650,000 units.

In South America, revenues increased $0.2 billion to $1.5 billion. Wholesale volumes rose 15.7% to 103,000 units.

Zacks Investment Research Page 4 www.zackspro.com In Europe, revenues increased $0.6 billion to $6.9 billion. Wholesale volumes increased by 22,000 y/y to 342,000 units.

In the Asia-Pacific region, revenues increased $0.6 billion y/y to $3.7 billion. Wholesale volumes decreased 4.8% to 379,000 units.

In the Middle East & Africa segment, revenues declined $0.2 billion y/y to $0.6 billion. Wholesale volumes plunged 6,000 units to 30,000 units.

Financial Services: Ford Credit registered pre-tax profit of $600 million in third-quarter 2017, up 5.8% y/y.

Outlook

The company anticipates global GDP growth and industry volume to remain steady in 2017. Revenues in the Automotive segment are likely to be around equal to 2016 figure of $141.5 billion. In 2017, operating cash flow in the Automotive segment is projected to remain positive but lower than the 2016 level.

The firms believe that Ford will benefit from strong product mix, higher volume and product launches. Ford will benefit from strong demand for truck and SUVs in North America.

Some firms are of the opinion that auto sector will continue to expand globally. This is because of the low vehicle ownership in the developing nations. The firms expect increased demand for vehicles from countries like China due to the proliferation of the middle class. Moreover, due to higher demand for replacing the old internal-combustion engine vehicles with zero-emission EVs is likely to drive auto sales in the coming days.

The firms think that strong demand for SUVs and trucks in North America will favorably impact the automaker’s results. However, Ford has limited market share in the biggest automobile market, China. In fact, there are several local automakers and a wide array of foreign automakers in China, and the firms do not foresee any sizeable growth in the market share in China.

Margins

Ford’s adjusted pre-tax profit was $2 billion in 3Q17, up $0.6 billion from the year-ago quarter figure.

Segment Details

Ford Automotive: The segment’s pre-tax profit rose to $1.7 billion from $1.1 billion a year ago.

Pre-tax profit from North America increased to $1.7 billion from $1.3 billion a year ago.

Ford’s South America segment’s pre-tax loss amounted to $158 million, narrower than $295 million in the prior-year quarter.

The Europe segment incurred pre-tax loss of $86 million against pre-tax profit of $138 million in the prior-year quarter.

The Asia-Pacific segment reported pre-tax profit of $289 million, up from the year-ago quarter profit of $131 million.

Zacks Investment Research Page 5 www.zackspro.com The Middle East and Africa segment incurred pre-tax loss of $60 million, narrowing than the prior-year quarter loss of $152 million.

Financial Services: Ford Credit generated pre-tax profit of $600 million in 3Q17, up from $567 million in the prior-year quarter.

Outlook

In 2017, the company projects operating margin in the Automotive segment to be lower than the 2016 level.

In 2017, the company expects operating margin and profit in North America to decline from the 2016 figure. Rise in commodity, product and engineering expenses as well as unfavorable exchange can be attributed to the decline in projection. However, in South America, the company anticipates 2017 loss to narrow down from the 2016 figure due to economic recovery.

In Europe, the company expects to remain profitable in 2017, though the profit level is likely to remain below the 2016 level. High commodity expenses and adverse effects due to Brexit are likely to aid the company’s results, which are being offset by improvement in Russia and conducive market conditions. Results in Middle East & Africa are likely to improve in 2017 because of favorable exchange and low expenses, which are being partly offset by low volumes. In the Asia Pacific region, the company projects pre-tax profit to increase from that of the 2016 figure because of favorable volume and mix as well as low cost. These positives are likely to be partly offset by unfavorable exchange rate and low industry pricing in China.

The company anticipates 2017 pre-tax profit for the Ford Credit segment to be more than $2 billion, which is likely to be driven by robust volume and mix.

The automaker faces several expense-related headwinds from product launches and higher tax rates. The firms are, nonetheless, hopeful about Ford’s efficient cost management. Also, strong light truck and SUV trends in North America are expected to have a favorable impact on operating margins.

Earnings per Share

Ford posted adjusted earnings per share of 43 cents in 3Q17. The reported figure was 17 cents higher than 3Q16. Also, earnings surpassed the Zacks Consensus Estimate of 33 cents per share. Results were driven by improved growth rate, profitability and cash flow.

Outlook

The company has tightened 2017 adjusted EPS to the range of $1.75-$1.85, backed by better operating performance.

The firms expect the company’s product launches to increase earnings. However, increasing reliance on incentives to drive higher volumes and uncertainty in Europe and South America might negatively impact its earnings potential. Moreover, Ford is investing heavily in emerging opportunities, specifically in electrification and development of autonomous vehicles, which may limit its earnings potential in the short run.

Jun 6, 2017

Zacks Investment Research Page 6 www.zackspro.com Analyst Sanjoy De Copy Editor Ritujay Ghosh Content Ed. Anindya Barman

Lead Analyst Sanjoy De QCA Anindya Barman No. of brokers reported/Total brokers 12/16 Reason for Update 3Q17 Earnings Update

Zacks Investment Research Page 7 www.zackspro.com