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Morningstar | Ford Finally Breaks Through With Good 1Q but Says This Is the Peak for 2019

We are not changing our Ford fair value estimate following a good first quarter. We and the market have been waiting for signs of CEO Jim Hackett's cost-cutting measures positively affecting results, and this quarter showed that. We see no reason to change our fair value estimate. Adjusted diluted EPS of $0.44, up 2.3% year over year, beat consensus of $0.26 and sent the stock up over 8% in April 25 after-hours trading.

There were many positives to the quarter, including that management now guides for 2019 results as better than 2018 rather than just potentially better, but we caution that management expects the first quarter to be the best one of 2019. The rest of the year has more restructuring charges coming as Ford continues on its three-year journey to realize $11 billion in EBIT savings through 2021. 2019 also has many important new vehicle launches, but these launches have up-front costs before the cash comes in the door in the quarters after launch. Those costs will weigh on the second through fourth quarters. Key launches this year include the Ranger midsize pickup in North America (already out but not yet in full production), the Lincoln Aviator and Ford Explorer crossovers in mid-2019, the new Escape/Kuga and Lincoln Corsair crossovers in late 2019, and a freshened Super Duty late this year. Light-truck momentum continues in 2020 with the return of the Bronco and a new-generation F-150, probably Ford's most profitable vehicle.

The quarter to us is a great illustration of why Ford was right to exit most car segments to focus on light trucks. Exiting sedans along with strong Ranger and F-Series helped North America post $679 million of improved pricing and improve segment EBIT by 14% to $2.2 billion. Segment EBIT margin rose 90 basis points to 8.7% but has a ways to reach management's 10% target. An incremental $1 billion-plus of EBIT by 2021 versus 2017 to make the Ranger and Bronco at Michigan assembly should help Ford improve margins further.

Moves like moving to a minority position in Russia, closing a truck and Fiesta plant in Brazil, and cutting costs and updating old product in China should help international operations over time. Also positive is healthy loan performance at Ford Credit along with less supplemental depreciation needed to get vehicles to estimated residual values enabled the captive to increase segment EBIT 25% to $801 million for its best quarter of any quarter in about nine years.

The foreign segments combined lost $196 million in EBIT, roughly flat year over year, but improved by $632 million from the fourth quarter. Europe, the Middle East and Africa, and Asia excluding China, were profitable but South America and China continue to face headwinds. South America's $158 million loss was roughly flat year over year as poor Argentine results and weak local currencies against the dollar were mostly offset by cost reductions and price increases to offset inflation and commodity costs. The Sao Bernardo plant closure announced recently will occur near the end of 2019 and will have about $460 million in special item charges. Management expects payback time for the closure of about two years.

Ford China has suffered severely over the past year-plus for old product and likely an inefficient cost structure. New leadership finding $186 million in cost savings for the quarter, a $119 million currency tailwind, and the successful launch of the new Territory SUV partially mitigated a $179 million negative variance from the joint venture part of Ford China, leading to the segment loss narrowing to $128 million from $150 million. More cost savings and the launch of the Kuga and Lincoln Corsair later this year should help Ford China remain in the red but still narrow its full-year 2019 loss relative to a horrible 2018 loss of $1.5 billion.

Also of note this week is that on April 24, Ford announced a $500 million equity stake in Michigan-based startup electric vehicle maker Rivian. Joe Hinrichs, president of Ford Automotive, will join Rivian's board and Rivian's flexible skateboard platform will be used by Ford for a yet-to-be-named all-electric vehicle. Details were thin, but we suspect the vehicle will be a light-truck model because Rivian's first two vehicles are a pickup, the R1T, and an SUV, the R1S. Rivian is viewed by some as the next Tesla and has received funding already from Amazon and Saudi Arabia, so we see the money as a reasonably low-risk, potentially high-reward move financially, plus Ford and Rivian may partner on other things, in our view, such as autonomous vehicles. Rivian was rumored to be talking with General Motors, but these talks broke off recently. We suspect GM wanted too much from Rivian in terms of exclusivity and Rivian walked away and quickly worked out a deal with Ford.

We question why Ford needed to do this deal, given that it is already developing its own battery electric vehicles, already makes good trucks and SUVs, and we think can design more platforms itself if need be. The Rivian investment does offer upside if it grows like Tesla, and Ford probably wanted an already-developed platform for faster introduction of a BEV. CEO Hackett said on an April 24 call regarding Rivian that this deal is complementary to Ford's possible BEV partnership with Volkswagen because Rivian's platform is a larger vehicle segment, but we think Ford is also giving itself leverage in negotiations with VW by showing the German firm that Ford already has a BEV partner.