Ford Earnings - Behind the Headlines
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When you own stocks, every three months you get a chance to read from the company's perspective what has happened over the last three months, and what the company expects going forward. These earnings reports are often skimmed over, and rarely read completely because of the time it takes to read through the notes, financials, and management's discussion. If you take the time, it's interesting what you can learn about a company in these earnings releases. A stock I've owned for a few years is Ford (NYSE: F). While the headline numbers for Ford didn't look terrific, there were some reassuring numbers behind the headlines. Let me show you what I mean.
On the surface, automotive revenues were down 1.65% and financial services revenue was down 7.51%. The gross margin also dropped from 7.5% last year to 5.26% this year. However, part of the drop in margins was due to the company adjusting inventory levels to match demand. This hurts the company's results in the short term, but is the right move for the long term. Since none of this sounds like the reassuring news I promised, let's move onto some of the lesser reported, but equally significant numbers I found.
To really understand Ford, investors need to realize they are buying two organizations in one. Ford Auto is the part of the company that produces all of the vehicles. Ford Financial could be best compared to a large bank or a credit card company. Though both divisions end up on one income statement and balance sheet, the company does break out their results to help out the average investor. Many people look at Ford's long-term debt and assume the company has too much leverage. This is a widely mis-understood part of Ford's story. On the automotive side, the company holds a net cash and investments position of $10.513 billion. General Motors (NYSE: GM) does basically the same thing by breaking down their automotive and financial divisions. While Ford's net cash position isn't quite as impressive as the roughly $29 billion in net cash and investments that General Motors has, Ford did not have to go through bankruptcy and is not part owned by the Federal Government either.
The Ford Financial arm of the company acts much like a bank or credit card company, and it makes sense to compare it the same way. This division holds finance receivables and leases on the asset side, and long-term debt on the liabilities side of the balance sheet. This is similar to a bank with its loans as assets and deposits as liabilities. For instance if you look at a bank like Wells Fargo (NYSE: WFC), you can see they have about $1.11 trillion in loans and about $920 billion in deposits for a ratio of about 1.21. Ford Financial holds $86.228 billion in finance receivables and leases, and $86.779 billion in debt to show these are loans and leases. This gives Ford Financial an assets to debt ratio of about 0.99. The difference is, while Wells Fargo has actual depositors behind these liabilities, Ford Financial's liabilities are more of a way to account for the fact that the assets exist on the other side of the balance sheet. The point is, thinking that Ford holds $86 billion in long-term debt is really a mis-conception because the majority of this is directly offset with assets from Ford Financial.
Since Ford Financial does have such a significant impact on the company's balance sheet, one worry investors might have is the portfolio's credit quality. There are some very encouraging numbers in this section of Ford's report. First, retail credit quality (loans to individuals for vehicles and leases) has improved nearly sequentially for the last five quarters. When it comes to past due percentage and charge offs, Ford Financial has a record that banks and other financials could only hope for. On the retail side of the house, the company's domestic 60+ days past due has dropped in the last year from 0.24% to 0.18%. Charge-offs have also declined from 0.189% last year to just 0.179% this year. Looking at international retail credit quality, the numbers have improved here as well. The company's 60+ days past due has dropped from 0.415% last year to 0.371% this year. Charge-offs have also improved from 0.489% to 0.419%. To top it all off, wholesale credit quality (dealer financing) has improved in the last year as well. Ford says that 98.21% of its domestic dealers are considered to have favorable or strong financials versus 98.19% last year. The international wholesale division saw an even greater improvement, with 86.58% being rated as strong or favorable versus 84.13% last year. While in the short-term these past due and dealer metrics don't make a huge difference, they do set Ford up for stronger results in the future. Less credit issues for both retail and wholesale means more interest income, less losses from bad credits, and more time to focus on growing the business.
One additional factor that came into play in the first quarter, and will effect the remainder of the year is pension obligations. Ford contributed $1.1 billion to pension plans in the first quarter which lowered cash flow. The good news is, Ford expects to contribute an average of $867 million in the remaining three quarters. While this is significant, it is less than the first quarter and should give Ford a boost to cash flow for the remainder of the year.
In conclusion, Ford did show slower growth in the first quarter, but that is also a slower quarter for the company. Moving into spring, the outlook for the auto industry has improved. Several automakers have raised their guidance for sales to 14-14.5 million units from the previously expected 13.5-14 million units. With stronger sales, new models being introduced internationally, and less pension contributions to make, Ford should have increasingly better quarters. The new dividend is well covered with the company's free cash flow payout at just 19.35%. With improving cash flow, the company's debt should also see an increase in ratings at some point, which would cut the company's interest costs further. With Ford beating earnings expectations in the first quarter, the company has a good start to what should be a good year.
MHenage owns shares of Ford. The Motley Fool owns shares of Ford and Wells Fargo & Company and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Ford, General Motors Company, and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
