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Morningstar | Ford's 2019 Outlook Cautious on Macro Issues Despite New Light Truck Offerings

At an investor conference held in Detroit with the auto show on Jan. 16, Ford gave a high-level 2019 outlook and updated 2018 guidance. The news was not great but it was not terrible either, and we do not see a reason to change our fair value estimate. We had been hoping for more of an upbeat tone given Ford is bringing many new light truck models to market in 2019, but we think management is remaining more cautious for now. For 2019, management expects another full-year loss in China but less of one than it will have for 2018. For the whole company, management would only say it sees potential this year for improvement from 2018 in metrics such as revenue, adjusted EBIT margin, and adjusted debt to EBITDA. Key assumptions for this outlook include a managed Brexit process. I n his presentation,  CFO Bob Shanks said no deal would be catastrophic for Ford U.K. and the U.K. auto industry, so Brexit will be something to watch this year. Despite the recent rejection of a plan in Parliament, Shanks said Ford still expects no deal to be the least likely outcome.

Ford also said it can fund all its needs, including the dividend, from operations. We have long believed the regular dividend is safe but will not grow soon, which has proven correct, but we also expected the special dividend Ford has paid in recent years to go away at times and that, in our view, looks to be true for 2019. With a distribution from Ford Credit back to the parent and Ford finishing 2018 with $23.1 billion in cash and $34.2 billion of liquidity, we continue to think the regular dividend is safe. Ford announced an unchanged first-quarter dividend of $0.15 per share.

Ford reports fourth-quarter 2018 results on Jan. 23 but gave preliminary full-year 2018 guidance of adjusted diluted EPS of $1.30, slightly below consensus but in line with October guidance of $1.30-$1.50. The full-year guidance implies fourth-quarter EPS of $0.30 versus consensus of $0.32.

New products such as the Explorer, Escape, and Lincoln Aviator in the U.S. and future new light truck models in China and the U.S. such as the Bronco, another "rugged" utility, and a new Lincoln light truck offering give reason for optimism in 2019 and 2020 provided the U.S. economy remains healthy. Headwinds this year, however, include more exchange pressure and $700 million in commodity headwinds, declining used vehicle values impacting Ford Credit's off lease portfolio, and a tax rate in the low-20% range versus about 10% in 2018. The company said more restructuring news will be coming this year from South America and last week said the Sollers joint venture in Russia is under review, so we expect more one-time cash and noncash charges still to be announced this year.

Also during the auto show on Jan. 15, Ford announced an alliance with Volkswagen. We felt this announcement was receiving too much attention in the media in the days leading up to it because we did not expect a major alliance such as Renault-Nissan. Our theory now seems correct to us because we do not see reason to be very excited about this alliance anytime soon. Both firms are, in our view, starting with collaboration in a few areas, midsize pickups and commercial vans, to see if they can work well together. Ford will develop pickups as part of the alliance for markets outside the U.S. for sale as soon as 2022. Ford will also develop commercial vans, while VW will build a city van. Both companies do not expect a benefit to pretax results until 2023, which for Ford management estimates at $500 million annually. Ford is already good at pickups and commercial vans, so perhaps Ford is willing to help VW get scale in pickups beyond its Amarok model in exchange for Ford receiving more scale help from VW in Europe, South America, and South Africa, and we theorize perhaps later in China where VW is one of the largest automakers. The vans will be for Europe and the pickup for South America, Europe, and South Africa, though VW CEO Herbert Diess said the pickup could potentially be sold in the United States. The two firms also are exploring cooperation on electric and autonomous vehicles, so there may be more announcements coming later. For now, there is no cross ownership between Ford and VW, and, in our view, it's possible there never will be significant cross ownership given both firms are family controlled. The alliance will be run by a committee from both firms and led by both CEOs.