The growth story at Ford Motor Company (NYSE:F) suffered a setback during the first quarter as the costs of recalls bit into profits.
The company said it had income of $1.6 billion, 40 cents per share, on revenue of $39.1 billion, compared with net income of $2.4 billion, 61 cents per share, and revenue of $37.7 billion a year ago.
Despite this, the shares rose nearly 2% in premarket trading because the company had warned about the number last month, predicting profits would come in at 30 cents to 35 cents per share.
The biggest contributor to the shortfall was the cost of repairing cars under warranty, which rose $467 million. The company also spent $253 million more on product launches than a year ago, and $176 million more on commodities.
The company issued an optimistic set of estimates for the full year, saying costs should not increase for the rest of the 2017 and the company should earn $9 billion.
Ford Car Sales Peaked
U.S. car sales peaked in December at 18.7 million units, coming in at just 16.9 million for the month of March.
The peak came in well short of peaks achieved in previous recoveries, but until March had been within a range of 17 million-18.7 million for two years. The average car on U.S. roads is now 11.6 years old, a full year older than it was in 2010, as U.S. automakers have worked to match the quality of foreign cars.
Unlike rival General Motors Company (NYSE:GM), Ford is not making up for U.S. weakness with strength in China. The company’s sales there last month came in at 90,457 units, down 21% from a year earlier, and were down 19% year over year.
Changing Chinese tax laws on new auto purchases were blamed. A tax of 10% dropped to 5%, and then rose this year back to 7.5%. Sales of cars not subject to the tax, those with larger engines, were up 21% against a year ago.
Our Tom Taulli was recently down on Ford, saying the stock is cheap but “cheap is not enough.” He wrote that Ford has become a niche player, and its niche is light trucks like the F-150. Its vaunted entry into new markets like electric cars and self-driving cars are thus hampered by lack of scale.
F Stock a Bargain?
Auto stocks have been cheaper than the market throughout this decade. Despite not having taken a bailout in 2009, Ford has languished with the rest, losing one-third of its value since a 2014 peak of nearly $18 per share. It will open for trading on Apr 27 at under $12.
This has left it with a price-to-earnings multiple of barely 10, and a dividend rate of 5.2% that has become the best reason to own the stock. The company usually covers this dividend with earnings, and the most recent quarter is no exception. An extraordinary 2016 led to a 20-cent-per-share dividend paid in January, but the rate fell back this month to its regular 15-cent-per-share level.
F stock’s balance sheet shows the total debt-to-assets ratio being kept level at about 60%, but half of that consists of current liabilities endemic to the auto business, things like short-term debt and accounts payable. Long-term debt comes in at a little over $90 billion on nearly $240 billion in assets.
The bottom line remains what it was before the report. Ford is a great stock to buy for income, but a lousy stock to buy for capital gains. Since it re-launched its dividend in 2012, it has tripled the payout, while the shares have gone nowhere, and it would be wrong to expect that to change.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.