Ford turns bearish on soft FY16 outlook

One-time costs of $600 million associated with the replacement of faulty door latches took a toll on the fiscal 2016 third-quarter income of the automotive manufacturer Ford Motor Co. (NYSE: F). The company’s revenue and earnings topped consensus estimates. Ford also re-affirmed its full year revenue guidance. Still, the shares are expected to decline further due to the reasons mentioned below.

The Dearborn, Michigan-based company reported 3Q 2016 revenues of $35.943 billion, down from $38.144 billion in the similar period last year, but higher than the Zacks estimates of $32.02 billion.

Volume wise, global sales declined 4% to 1.5 million vehicles. Compared to the previous year, Ford sold fewer vehicles in all the markets except Asia.

Ford Vehicles

Ford, which is in the process of cutting-down the production of F-150 truck to reduce inventories, posted third-quarter net income of $961 million, down 56% from $2.192 billion in the similar quarter last year. On a per share basis, the 3Q earnings were down to $0.24 per share, from $0.55 per share last year. Excluding costs, the non-GAAP earnings of $0.26 per share were higher than the Street’s estimates of $0.21 per share.

The company is taking steps to bring down the production levels in line with the declining demand in the US. Ford announced temporary closure of four North American plants earlier last month. It can be noted that the sales in the US had declined 11% on y-o-y basis. Correspondingly, Ford suffered an 8% decline in revenues.

The company reaffirmed its full year 2016 pre-tax profit outlook of $10.2 billion. However, it is still lower than the $10.8 billion pre-tax profit recorded by the company in 2015. Ford also anticipates operating margin in the North America to be lower than 10.2% recorded in 2015. Furthermore, the company stated that the profit would decline in 2017 as well. Ford expects the profit to increase only in fiscal 2018.

Detailing further, the sixth largest automaker in the world is forecasting higher loss from the South American region, compared to $832 million loss reported in the prior year. In the Middle East and Africa, Ford anticipates posting profits, but lower than $31 million reported in 2015. Even in the Asia-Pacific region, Ford expects the pre-tax profit to decrease below the level of $765 million recorded last year. Only in Europe, Ford anticipates an increase in the profits, compared to $259 million reported last year.

The cash and cash equivalents of the company, at the end of the third quarter, was $13.34 billion, down from $14.27 billion in the similar period last year. Similarly, the debt increased to $13.1 billion at the end of the third-quarter, up from $12.8 billion in the corresponding period last year.

The stock faces strong resistance at 12. The stochastic oscillator is pointing downwards, thereby indicating that the downtrend is far from over. The next support for the stock is seen at 11.20.

So, a trader can consider investing in a one touch put option with a target level of $11.20 to earn from the forecasted decline of the stock. The trader should also select a one month time frame for the expiry of the put option.

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