China, tariffs ding Ford Q3 profits

Ian Thibodeau
The Detroit News
Ford Motor Co. shares shrugged off a downgrade by Morgan Stanley on Friday, after the investment bank said the carmaker's earnings and cash flow are under pressure and its dividend is at risk.

Dearborn — Ford Motor Co. profits slid 37 percent in the third quarter due mainly to continuing losses in China and costly steel tariffs, the company said Wednesday, and it will not reach its pre-tax margin targets for 2020. Net income is down 27 percent for the year.

Ford booked net income of $991 million in the third-quarter on $37.6 billion in revenue, up 3 percent for the quarter. But the Dearborn automaker lost $378 million in China alone, Chief Financial Officer Bob Shanks said Wednesday. That's 20 percent less than the company lost there in the second quarter, but enough to ding the increased revenue and profits generated by its North American business.

Shanks added that tariffs on steel are increasing prices and creating a bubble currently costing Ford millions despite all the benefits the company has received from policy decisions under the Trump Administration.

"What we still are waiting for…is that steel and aluminum be included in (the United States-Mexico-Canada Agreement) so that the increase that we’ve seen from the 232 tariffs that have created effectively a bubble on those commodities will be eliminated," Shanks said Wednesday.

He added that President Donald Trump's ongoing trade war will probably cost Ford $1 billion this year. Of that, $600 million can be attributed to rising commodities costs; $200 million is related on tariffs between the United States and China; and the remaining $200 million is related to Ford's decision a few months ago to cancel plans for the Focus Active crossover it planned to import from China.

In a punishing day on Wall Street, shares in Ford closed down 4.71 percent at $8.19. The broader Dow Jones Industrial Average dropped more than 600 points, officially giving up all of its gains for the year. The S&P 500 lost more than 3 percent, and the Nasdaq slumped more than 4.4 percent, officially entering a correction.

One net effect of higher interest rates, fatter commodity prices and plateauing demand: Ford will not hit its target of an adjusted earnings margin of 8 percent by 2020, Shanks said. The automaker reported a 4.4-percent margin company-wide Wednesday, off 1.9 percentage points compared to a year ago.

The third-quarter slip comes as headwinds increase for U.S. automakers and other manufacturers due to President Donald Trump's ongoing trade war, rising U.S. steel and aluminum prices and rising interest rates. Investors are also looking for details from Ford, specifically, regarding CEO Jim Hackett's ongoing $25.5 billion cost cutting push and the $11 billion he plans to spent restructuring the global business.

Joe Hinrichs, Ford president of global operations, said Monday that U.S. steel is now the most expensive in the world. Ford has said previously that it sources most of its steel and aluminum from U.S. companies. A representative from the American Iron and Steel Institute declined to share information on pricing, citing anti-trust laws.

The $1 billion costs due to trade, coupled with an industry-wide U.S. vehicles sales plateau, are slamming the company's bottom line. Ford's U.S. sales are down 2.4 percent so far this year.

"Ford, like many other automakers, is facing the backside of 'peak auto' in the U.S.," David Kudla, CEO of Grand Blanc-based Mainstay Capital Management LLC, wrote in a note prior to Ford's earnings release. "As long as investors feel in the dark on the future of Ford, the stock will suffer."

Ford’s stock price has hovered around $8.50 per share for two weeks. Off about 20 percent since Hackett ascended to the top job, the price is at a six-year low. Wednesday, the stock was off more than 3 percent, trading below $8.30 per share

The company is planning global layoffs to its white-collar workforce, leaving non-union rank-and-file Ford employees uncertain about their future. Senior leadership is pushing to get its North American profit margin back to 10 percent — the automaker posted an 8.8 percent North American margin in the third quarter.

Ford reported $2 billion in earnings before interest and taxes in North America, up roughly $100 million from a year ago. The automaker lost $245 million in Europe, $152 million in South American and $208 million in the Asia Pacific region. The Middle East and Africa segment reported a $47 million profit. Ford also spent $196 million in its mobility segment, 172 percent more than a year ago.

Earlier this month, Ford used an "Inside the Oval" event in Las Vegas to woo its national dealer body with plans and products for the future. Dealers expressed confidence in Ford's product plans for the next few years after a week of meetings there, but that did little to spur investors. 

Morgan Stanley analyst Adam Jonas on Oct. 19 cut Ford's $14 overweight price target (a "buy" rating) to $10 equal-weight (essentially, a "hold"  rating). He said in a note that investors are cautious of the No. 2 U.S. automaker, saying it lacks transparency and action on its $11-billion global restructuring plan, and has fallen behind competitors in its electric and self-driving vehicles ventures.

A Ford spokesman said then the company was confident investors would recognize Ford's value over time.

Ford then on Tuesday announced plans to split its business in China from what was formerly Ford Asia Pacific, and appoint a new CEO atop a leadership team made up of mostly Chinese nationals to boost performance in the world's largest auto market. 

The company after the second quarter adjusted its full-year outlook because of worse-than-expected performance in Asia and Europe. It affirmed that guidance Wednesday.

"This quarter shows that our business remains strong in key areas," Hackett said in a statement. "We continue to make progress on our efforts to redesign Ford to be far more competitively fit, disciplined in capital allocations and nimble enough to win in a fast changing world."

Twitter: @Ian_Thibodeau