Ford (NYSE:F) reports its second-quarter results July 30 after the markets close. Analysts expect that the company will lose billions. While F stock has been on a roll in July — up more than 16% through July 27 — if the news is terrible, shareholders can forget about its momentum.
When I say terrible, I mean really bad. Wall Street has rock-bottom expectations for Ford and its peers. That’s why F stock has been rising in July. In the absence of any expectations, Ford is as cheap as they come.
“Expectations are obviously extremely low given volumes were so bad,” Morningstar analyst David Whiston told CNBC. “The biggest thing I care about is how bad was the cash burn.”
Analysts expect Ford to lose $4.9 billion in the second quarter. Ford has said it plans to lose more than $5 billion in adjusted earnings before taxes. In the first quarter, it burned through $2.2 billion in cash. It ended the quarter with $35.1 billion in automotive liquidity.
What Did Earnings Look Like in the Past?
For all those long F stock, it’s important to note that in 2011, the company’s most profitable year of the past two decades, it made $8.7 billion in pre-tax income from $136.3 billion in sales. Ford’s automotive liquidity in 2011 was $32.4 billion. That’s $2.7 billion less than what it is today.
That speaks to Ford’s relatively stable financial position.
However, once earnings come out, you can be sure that the company’s cash position and automotive liquidity will have dropped dramatically. Analysts like Whiston will be interested to see how fast Ford can reduce its automotive debt, which doubled in the first quarter to $30.5 billion.
“Ultimately what I want to know is how much of the debt can they pay off by year-end,” Whiston said July 28. “What’s the capital structure going to look at the end of the year?”
Getting Back to Normal
The faster Ford can get back on track to rebuilding its business, the better it will be for F stock. The actual numbers in the second quarter won’t be pretty. Analysts are looking ahead to the future. Where is Ford headed in the next six to 12 months?
One thing I’ve personally noticed about the truck market is that dealers can’t keep the inventory they have on the lot. The demand is high. Ford is pushing production of its F-150 to restock inventories, but with the novel coronavirus keeping people out sick, it’s not going to be easy to get things back to normal.
Ford’s in the middle of an $11 billion restructuring over the next few years that should keep costs down while it works on new vehicles such as the Ford Mustang Mach-E and Ford Bronco, which some are dubbing the “Jeep Wrangler” killer.
If you’re looking for some clarity from Ford on when automotive sales will return to pre-pandemic numbers, you’re going to be sadly disappointed. Some experts don’t see things getting back to normal until 2023.
On a positive note, the company revealed July 2 that it took retail share in the second quarter in several categories, including pick-up trucks and vans. As a result, it generated its best retail share in five years.
The Bottom Line on F Stock
I’ll be shocked if Ford delivers Q2 2020 results that sink its share price. No one expects it to provide anything other than a throwaway quarter. The reduction in sales in the second quarter — 33.3% lower than a year earlier — says all you need to know about the top and bottom lines.
So how should Ford move forward? CEO Jim Hackett needs to provide a vision for how Ford can get out of this mess.
No one expects Ford to suddenly generate a profit in a market that has taken a big hit. However, as InvestorPlace’s Chris Lau recently argued, Ford has gone from a two-trick pony with the Mach-E and F-150 to a three-trick pony with the Bronco.
If Hackett can send a positive message to investors that there’s a light at the end of the tunnel, I think Ford’s momentum will continue.
That said, I still believe F stock is best for aggressive investors. The risks remain high.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.