Ford’s new chief executive officer surprised Wall Street with better than expected earnings despite familiar challenges of a slow U.S. auto market and an aging model lineup.
In its first results since Jim Hackett became CEO in May, Ford delivered second quarter adjusted earnings per share of 56 cents, beating analyst estimates. While the carmaker boosted its annual profit forecast, it’s due to a lower-than-expected tax rate.
“The quarter shows the underlying health of our company,” Hackett said in a statement Wednesday. “But we have opportunity to deliver even more.”
Hackett took over Ford’s top job after the board ousted his predecessor Mark Fields for not acting decisively to reverse a three-year stock slide. Credited with reviving office-furniture maker Steelcase, Hackett has a mandate to both clarify and accelerate Ford’s strategy to take on Silicon Valley in the race to driverless cars. In the meantime, the automaker is cutting costs as a dry spell in new model introductions coincides with the U.S. auto market declining for the first time in eight years.
“It’s still going to take a while to see anything in the results” from Hackett’s efforts, said David Whiston, an auto analyst with Morningstar in Chicago. “Regardless of who is CEO, they just don’t have a lot of new vehicles right now. You don’t change that in one or two quarters.”
Ford forecast full-year profit in the range of $1.65 to $1.85 per share, adjusted for some items. That’s up from about $1.58 per share projected previously, Chief Financial Officer Bob Shanks told reporters at the company’s headquarters in Dearborn, Michigan.
The improved outlook comes from an expected tax rate of 15 percent this year, half of what the company previously anticipated. Ford lowered its rate by utilizing tax credits it had accumulated in overseas markets where it had suffered losses, Shanks said. Next year, Ford’s tax rate is likely to return to 30 percent, he said.
Ford shares slipped 1.2 percent to $11.14 as of 8:27 a.m. in New York, before the start of regular trading. The stock dropped 7.1 percent this year through Tuesday’s close, trailing the benchmark S&P 500 Index’s gain.
Hackett already moved to staunch the bleeding from its Focus compact, with its U.S. sales down 20 percent this year as buyers shun traditional cars in favor of sport utility vehicles. Hackett scrapped a controversial plan to move Focus production from Michigan to Mexico and instead will build the car in an existing factory in China, where labor costs are cheaper. Ford expects to save $500 million as a result of the move.
Ford also has canceled plans to sell the next-generation Focus in South America, a market where the company has posted losses amid economic instability, Shanks said. The automaker has reduced spending on the next Focus by $1 billion overall, which will be deployed to vehicles and projects that generate greater profits, he said.
“We have a number of things that we would love to do that we didn’t think we necessarily had the capital to do, that can generate higher returns,” Shanks said. “Some of that is in utilities, some of it is in trucks, commercial vehicles, certainly some of that would be in some of the growth areas” such as self-driving cars and electric vehicles.
Curtailing plans for the Focus may be just the first step in a more radical transformation plan that could see Ford step up its spending on web-connected cars powered by electricity and driven by robots, Morgan Stanley analyst Adam Jonas has told investors. Some models that no longer sell or make money also could be cut from the lineup.
“We do not believe Jim Hackett was appointed CEO to run a ‘normal’ car company,” Jonas wrote in a report last month. “We see the potential for an unconventional realignment of the business.”
Jonas predicted Hackett may cut Ford’s earnings outlook by as much as 50 percent over the next two years. Fields had forecast pretax earnings will fall 13 percent this year to $9 billion before rebounding next year, as new models like the redesigned Lincoln Navigator start paying off.
Hackett has said he is taking his first 100 days to review previous plans and promises. He also may be considering new options. Ford recently entered preliminary talks to acquire electric carmaker Lucid Motors, according to people familiar with the situation. Staffed by engineers from rival Tesla, Lucid plans to begin producing a luxury sedan in two years capable of hitting speeds of 235 miles per hour.
Investors remain skeptical that Ford can take on Silicon Valley stalwarts like Alphabet Inc., Apple and Tesla that are aiming to dominate the autonomous age. Ford’s stock has risen slightly on Hackett’s watch, but remains off 37 percent from a high of $17.84 in July 2014. The shares closed at $11.27 Tuesday.
One drag on results is the state of Ford showrooms, with several important models starting to show their age. The Explorer SUV, last fully updated in 2011, is more than a year away from a redesigned version making its debut. The Escape, Ford’s top-selling crossover, is two years from its next overhaul, according to a study by Bank of America Merrill Lynch.
Ford has said its rugged Bronco SUV won’t make its return until 2020, while the comeback of the Ranger pickup is slated for late 2018. The biggest introductions Ford has coming soon are its large SUVs, with the Ford Expedition and the Navigator beginning sales later this year.
Investors are eager to hear how Hackett will take on challenges like collapsing sedan sales and mounting mobility competition, though expectations are low for a quick fix, Whiston said.
“There’s not a whole lot someone can do very quickly,” he said. “I don’t have wild expectations of the stock shooting up shortly after this management change, given that we’re at the top of the cycle and given that Ford’s profitability is already quite healthy.”