Shares of Ford (NYSE:F) have been under pressure a bit in the last few trading sessions. The spike in oil prices and restatement of mileage numbers for its vehicles might have added to the general cautious market sentiment.
Yet more factors might be at play. Investors very well know that 2014 is a transition year, although enthusiasm regarding Ford's performance in China continues. Perhaps the sentiment, and relative poor sales results for May compared to General Motors (NYSE:GM), which faced a huge chunk of negative publicity recently, might be factors at play.
That being said, I believe better days are ahead as the market will shift its focus from current issues toward the new year.
Mileage Revision While Oil Prices Spike
On Thursday, Ford lowered its hybrid mileage ratings for the second time in less than a year. Presumably a computer error was behind the wrong numbers as the company will pay compensation ranging from $200 to $1,050 to some 200,000 customers. At an average price of $500 per customer, the move could cost the company $100 million, impacting earnings by two or three cents per share.
In total six models will be affected. An example is the C-Max Hybrid which initially was marketed as achieving 47 miles per gallon. Previously Ford lowered this range to 43 miles which has now been adjusted to 40 miles a gallon.
The important EPA mileage results have now been reconfirmed in stringent validation tests under direct oversight of the agency, in a move which will hopefully mark the end of these adjustments.
The timing of this latest adjustment could not be worse. Uncertainty in Iraq has sent oil prices to new highs implying that the mistake is extra costly for drivers at the pump.
Modest US Results, Offset By Continued Strength In China
Earlier this month Ford released sales results for the month of May. Sales rose by 3% to 254,084 vehicles which appears solid. Yet sales fell short compared to a 13% jump posted by GM, despite the harsh publicity faced by its major competitor and the major recalls being announced.
While the 3% sales growth looked favorable compared to a 1% decline in April, and declines of 7% in January and 6% in February, it seems that Ford is seeing pressure on its US market share. This came after GM as well as Toyota (NYSE:TM) in particular have been posting stronger sales results.
The poor performance might be explained by a reduction in incentives being offered as the company tries to maintain inventories of its popular F-150 pickup trucks. F-series sales fell by 4.3% as the company is anticipated the launch of the redesigned and aluminum intensive 2015 F-150 series. Continued availability of credit and a recovery of the harsh winter weather were supportive to overall sales in other series.
Chinese sales grew much quicker in the month as Ford and its joint-venture sold 93,323 vehicles which was up 32% on the year before. This came as sales rose by 28% in March and 29% in April. Demand has been driven by the Focus and Mondeo models, with the premium Lincoln brand anticipated to be launched in October of this year.
2014 As Transition Year
As should be known to all investors in Ford, the company sees 2014 as a transition year as it launches 23 new products on a global basis, driving up costs which put pressure on earnings.
As a result, operating earnings are expected to fall from $8.8 billion in 2013 to an estimated $7-$8 billion this year. As reiterated when publishing its first quarter results, the company continues to execute on its Ford-One plan, working as a global team. The improvements in the balance sheet, solid demand and new introductions should allow Ford to report stellar results for 2015.
The automotive business has significantly boosted its financial footing, holding $25.2 billion in cash. The $15.7 billion in debt results in a solid net cash position of nearly $10 billion. Investors have been cautious so far this year after Ford started the year on a soft footing, posting first quarter operating earnings of just $1.38 billion.
Automotive earnings of $919 million were impacted by sizable charges related to US recalls and the devaluation of the Venezuelan currency.
Takeaway For Investors
Back in April, I last checked out Ford's prospects following the release of the soft first earnings report.
I concluded that the company saw relative strength in Europe and a very strong performance in China, more than offset by a weaker North American performance as well as a poor performance in South America. However I also noted that the company was taking aggressive charges and measures to proactively ¨clean-up¨ for incoming CEO Mark Fields.
At $16.50 per share, Ford is now valued at $66 billion or roughly $56 billion after subtracting the net automotive cash position. Based on projected GAAP earnings of $4 to $5 billion, shares trade at 12-13 times ¨transition¨ earnings. A strong built-up for 2015 could drive earnings much higher next year, which made me a buyer on dips.
I reiterate that stance today, and I'm very comfortable in maintaining my long position despite the recent correction.
Disclosure: The author is long F. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.