What Makes Ford Earnings Look So Good?

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Ford Motor Co. (NYSE: F) reported third-quarter 2017 results before markets opened Thursday. The automaker posted adjusted diluted earnings per share (EPS) of $0.43 on revenues of $36.45 billion. In the same period a year ago, the company reported EPS of $0.26 on revenues of $35.94 billion. Analysts were looking for EPS of $0.33 and revenues of $32.8 billion.

Adjusted pretax profit rose nearly 40%, from $1.41 billion in the third quarter of 2016 to $1.97 billion. A tax benefit of $426 million this year added $240 million to the quarter’s net income.

How much has Ford benefitted from lower tax rates? The company’s effective tax rate in 2016 was 32.2%. For the first three-quarters of 2017 the effective tax rate is 16.7% and in the third quarter alone the effective tax rate was 10.6%. So far in 2017, Ford has made provision for $1.04 billion in taxes compared with a 2016 three-quarter total of $2.53 billion.

Average transaction prices rose by $2,800 year over year on the company’s best-selling F-Series pickups, and Ford said year-over-year transaction prices rose more than twice the industry average in the quarter as incentives declined as a percentage of vehicle price increased by less than half the industry average. The average transaction price for a pickup in the quarter was $45,400.

CEO Jim Hackett said:

This quarter demonstrates that our tearm’s focus on fitness is showing early promise. But we know that we must accelerate that progress in the near term, while taking the necessary steps to fundamentally redesign our business operations to be more fit for the long term.

Automotive revenues totaled $33.6 billion for the quarter, up by $300 million year over year, and operating margin rose by 1.7 percentage points to 5%. Pretax profit rose by $600 million to $1.7 billion.

North American sales totaled 650,000 units and revenues came to $20.9 billion. Ford said it had 13.5% of the North American market, down 0.1 points from last year. Operating margin rose by 2.3 points to 8.1%.

Ford narrowed its adjusted EPS to the high end of its previous forecast of $1.65 to $1.85 and now expects EPS of $1.75 to $1.85 for the full year.

The consensus analysts’ estimate for fourth-quarter 2017 EPS is $0.48 on revenues of $36.17 billion. For the full-year the consensus estimates call for $1.74 in EPS and revenues of $142.66 billion.

While better margins and cost cutting have made a difference in Ford’s results, the company’s lower tax rate has more than pulled its weight.

Ford’s shares traded up about 1.5% in Thursday’s premarket at $12.24, after closing at $12.04 on Wednesday in a 52-week range of $10.47 to $13.27. The consensus 12-month price target on the stock was $12.27 before this morning’s report.