EUR 850.00 For Business Accounts Only

Morningstar | No Surprises in Ford's 4Q Results

We are not changing our Ford fair value estimate as fourth-quarter results were not different from what Ford guided to on Jan. 16 as explained in our note that day. Fourth-quarter adjusted diluted EPS of $0.30 missed consensus of $0.32. We will update our model after the 10-K is filed. We continue to think Ford's stock is undervalued but will require more investor patience. Brexit uncertainty looms and could force more dramatic European restructuring than Ford already plans. We also continue to believe the market is waiting for more results from restructuring actions and initiatives to make Ford more physically fit as CEO Jim Hackett likes to say. More news is likely coming soon for both Russia and South America. The latter lost $678 million in 2018.

Ford finished the year with $23.1 billion of automotive cash and $34.2 billion of liquidity so we think it can fund the regular dividend this year from the balance sheet and from distributions from the captive finance arm which had its best full-year pretax numbers in eight years. If things worsen in 2019, however, we think management may have to decide between the dividend and keeping an investment-grade credit rating at some point. If Ford can show some turnaround soon, we think it may buy it time with the rating agencies.

Europe will remain a turnaround story as its second restructuring program this decade gets under way this year, as explained in our Jan. 10 note. Ford Europe had a rough 2018, losing $398 million versus a $367 million 2017 profit. A $418 million foreign exchange headwind and higher product and commodity costs offset the benefit of Ford having record SUV sales in Europe. North America earnings for the quarter improved year over year by $188 million but declined by $450 million for the full year, mostly from a $2.2 billion headwind from higher warranty and commodity costs. The segment's commodity costs will likely remain high in 2019 but not be the severe $1.1 billion headwind they were in 2018.

Asia lost $1.1 billion, a $1.8 billion unfavorable swing from 2017, with China to blame. China is expected to lose money in 2019 but improve from 2018's horrendous $1.5 billion loss. About $1.4 billion of the loss came from the consolidated side rather than equity method accounting joint ventures. The consolidated part is vehicles made in North America and exported to China. These exports faced a 40% tariff in China last year due to the U.S. China trade war and moving these vehicles to Chinese production soon, such as the new generation Explorer currently made in Chicago, will help immensely per CFO Bob Shanks. Ford China's product dearth, much like in the U.S., finally ends in 2019 with China seeing 10 new launches and the unit is now at healthier inventory levels and reduced structural costs per management. These fixed costs for the whole company were flat for full-year 2018 versus 2017, which is an accomplishment given annual average increases for 2013-17 of $1.7 billion and suggests to us that Ford may eventually deliver upside earnings surprises in the future.