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Bright Spots for Ford Despite Missing Consensus

David Whiston, CFA, CPA, CFE (david.whiston@morningstar.com)

We are not changing our Ford F fair value estimate following second-quarter results that missed consensus with adjusted diluted EPS of $0.28 versus consensus of $0.31. Excluding a mark-to-market charge (required adjustment each quarter under GAAP) for the company's investment in Pivotal Software, adjusted EPS beat by a penny and would have been up $0.05 from $0.27 in second-quarter 2018. We saw bright spots in the quarter but the stock fell over 5% after hours on July 24 due to new 2019 guidance of adjusted EPS between $1.20 and $1.35 coming in well below consensus of $1.39. We had been modeling $1.32 but now model $1.21 in anticipation of further North American launch costs and third-quarter summer plant shutdowns weighing on the back half of the year. Cash and liquidity of $37.3 billion and improved free cash flow through the first half of the year gives us confidence the dividend is safe.

We understand the market's frustration with the guidance but we think Ford is moving in the right direction with many new crossover launches this year (Explorer, Escape, Aviator, Corsair) and next year (Bronco, Baby Bronco, Mustang inspired EV) along with the new generation F-150 coming in 2020. Ford's U.S. pickup business had its best second quarter in 15 years. Healthy pricing in pickups along with narrower China losses, Europe swinging to a $53 million profit from a $73 million loss, and fixed cost reductions enabled auto segment EBIT to rise 18.7% year over year and more than offset a $260 million foreign currency headwind from the euro, Argentine peso, and South African rand. North American profit was down slightly due to launch costs for new Explorer while earnings outside North America improved by 46% year over year to a $322 million loss. South America remains the most troubling foreign area, losing $205 million this quarter, and we expect poor results the rest of the year, but the Sao Bernardo truck plant closure at the end of 2019 should help next year's numbers.

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