Ford turns bearish on poor Q1-2017 earnings outlook

Automobile manufacturer, Ford Motor Company (NYSE: F) issued a gloomy fiscal 2017 first-quarter outlook last week. Following the announcement, the stock has so far lost about 6% of its value to close at $11.46 on Monday. As explained below, the issues faced by Ford are not expected to get resolved anytime now. Thus, in the week ahead, we forecast a further decline in the stock price.

In a regulatory filing made last Thursday, the Michigan-based company had forecasted earnings of between $0.30 and $0.35 per share for the first-quarter of fiscal 2017. The outlook is way below Wall Street analysts’ estimates of $0.47 per share.

In the same period last year, the company had reported earnings of $0.68 per share. This means that Ford expects a 50% y-o-y decline in Q1-2017 earnings. The company also cautioned that full-year 2017 pretax profit will decline to about $9 billion, from prior year’s $10.4 billion. Bob Shanks, CFO of Ford, is of the opinion that most of the anticipated erosion in the fiscal 2017 profit, compared to last year, will happen in the current quarter.

Ford Motor Company

Ford, which derived about 18% of its FY16 profit from used car financing, is also facing headwinds from the decline in the used car prices. The price of used cars declined 3.8% m-o-m in February. It is the eighth consecutive month of decline in the price. Adam Jonas, analyst at Morgan Stanley, is also of the opinion that the fall in the price of a used car would affect the Ford’s bottom line.

The company is facing a double whammy with declining demand for light and heavy vehicles, and increasing price of commodities such as steel. To reduce the negative impact, the company has already decided to reduce its production by 4% during the first quarter of the year.

After seven years of consecutive growth, the North American automobile market is facing a slowdown. Investors are concerned that it might turn into a cyclical slowdown that may extend for several months. The company’s operations would also get affected, if Trump alters the NAFTA agreement. The company has dropped its plans to build a new assembly plant in Mexico. However, Ford stated that it would still shift its remaining small car production from the US to one of its existing Mexican plants, as planned earlier. Thus, considering the overall slowdown in the automobile industry and headwinds faced by Ford, we anticipate the bearishness to continue in the short-term.

The stock faces minor resistance at 11.69. The MACD indicator is below the zero line and the stochastic oscillator is in the bearish zone. This indicates lack of support from buyers at this point in time. So, the stock is likely to go down and test the minor support at 11 in the near-term.

With a put option in place, a binary trader can realize a gain of up to 72% in a week’s time, if the forecast turns out to be true. The option should be bought when the stock trades near $11.59. Additionally, the trader should ensure that the contract remains active for a time span of one week.