Ford ($F): Is it a good buy following Q3 earnings report?

Ford beats estimates

Ford
Ford

US car maker Ford Motor Company (NYSE:F) has beaten the consensus in the third quarter of this year. The recall charges and launch costs have seriously hit its operating margins. However, that doesn’t prevent the company to keep intact its $10 billion pre-tax guidance figures for the year. Ford will have to report a strong fourth quarter in order to achieve that.  You should also watch out for the dividend payout ratio, because it seems that Ford will cut dividends if the issues persist.

Is the dividend safe?

For the quarter, Ford managed to beat the estimates and recorded earnings of $0.26 per share. However, investors should watch out because this quarter might not contribute to the earning for the fiscal year. Currently, Ford’s stock is in a dangerous position because of its increased investments. This might be due to the economic cycle of car sales in North America.

The company’s management has emphasized the strong performance in China and the Asia-Pacific region. Yet, its troubles in Europe seem to come to an end, as Ford brought in close to $140 million in pre-taxes during the quarter. In the commercial vehicles sector in the region, Ford significantly increased its market share. This is promising news.

Moreover, Ford has reported that its earnings in Asia-Pacific region have hit record levels. Meanwhile, the figures in China have increased significantly because of price cuts and other incentives.

So, should you invest in some Ford stock now?

There wasn’t much change in $F’s share price following its earnings report, as the management kept its pre-tax guidance figure for the year. Additionally, the management said that his year will be the second best year in earnings since the beginning of this century. Yet, where the earnings and sales are in the near term is what’s more important for the market. Not only that, but the management of Ford has attributed the nearly 50% decline in its third quarter earnings to temporary factors. Ford had $599 million in expenses for its door latches recall, which the management considers a temporary factor.

The company’s Super Duty pickups have negatively influenced its earning in the third quarter, because it had to deal with suppliers problems and launch expenses. However, because of those higher expenses investors should get used to the decreased earnings in the near term. And although the new pickups have generated some costs during the quarter, this is a sign that increased investment will follow up.

Oil? What does that have to do with the price of tea?

Ford’s new pickups are profitable, thus expect an impact in the segment over the coming year. As a result of dealers being over-stocked Ford’s operating margins has dropped notably.

In addition, the sales of Ford’s F-150 model are still pressured. For this reason, the company halted production at a number of plants. The management says that this is a temporary factor as oil prices are linked to pickup and SUVs sales growth. If oil prices keep increasing as they have been since February; Ford will feel further pressure, which could impact its margins.

Watch out for the dividends

In the third quarter, Ford paid out $600 million in dividends, which might seem fine, but numbers change quickly in the vehicles segment.

An increase of only $0.01 in the quarterly dividend for 2017 would add about $150 million to Ford’s annual dividend expenses. Don’t forget that the earnings estimates for next year are less than $1.52 annually, which will pressure the dividend. That is if low operating margin remains an issue.

For this, $F will need its markets abroad to keep up with the pace. And it should do that despite Brexit, which will further pressure Ford’s sales in the near term.

Now what?

Ford is able to deliver good results, which help to stabilize its stock. However, the company’s shares have been in a downward spiral for quite some time. Don’t be tempted by the high dividend. Just hang in there, wait for more favorable climate before considering Ford in the long term.

Disclosure:

I/we have no positions in any stocks mentioned and have no plans to initiate any within the next 72 hours.

I wrote this article and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock this article mentions.

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