Ford: Profits Will Dip on Spending for Future Growth

By Markets Fool.com

Ford plans to launch 12 new performance vehicles by the end of the decade. But there's a twist: some might be electric. Image source: Ford Motor Company.

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Ford Motor Company (NYSE: F) said on Wednesday that it expects its profits to decline in 2017 as it boosts spending in an aggressive planto transform the company and boost profits.

But its underlying business will remain strong, and profits will rebound in 2018, it said.

What Ford said about its outlook through 2018

As part of its annual Investor Day presentation, Ford detailed its earnings expectations for 2016 and 2017 and gave some general expectations for 2018.

As Ford first revealed in a regulatory filing last week, an expensive recall has forced Ford to lower its full-year 2016 profit guidance. It had previously expected to match or beat last year's record adjusted pre-tax profit of $10.8 billion, but it now expects its total adjusted pre-tax profit for 2016 to be about $10.2 billion.

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Ford expects the adjusted pre-tax profit in its "core business" of building and selling vehicles to improve every year from 2016 to 2018. But -- and this is a big "but" -- its total profit will decline in 2017 from 2016 because of what Ford described as "increasing investments and costs for emerging opportunities." It expects its total adjusted pre-tax profit to rise again in 2018.

Ford's big spending plans for 2017

Simply put, Ford is ramping up its spending to realize CEO Mark Fields' vision of Ford as an "automotive and mobility company." Broadly speaking, Ford's spending is driven by 3 goals:

  • Ford will "fortify" what it calls its "profit pillars": trucks, commercial vehicles, SUVs, and performance vehicles. These are all market segments in which Ford has a strong position now, and in which it realizes fat profit margins. The "fortification" will include investments in new products that will help it maintain and build on its strength in each area.
  • Ford will "transform" its efforts in segments where it sees room for improvement: It will boost its high-profit luxury Lincoln brand further, revamp its small-vehicle portfolio to lower costs and boost profitability, and make bigger investments in the emerging markets it sees as most promising.
  • Ford will "grow" by investing in opportunities beyond its traditional business. Those include electric vehicles (including plug-in hybrids), self-driving technology, and various alternative forms of "mobility." The latter will include investments to build out its recently acquired smart shuttle-bus and bike-sharing businesses in several American cities.

Ford's capital spending as a percentage of its automotive revenue is expected to rise from 4.9% in 2016 to 5.3% next year, and to 5.6% in 2018 -- but to decline thereafter. The majority of that additional spending will be driven by Ford's aggressive "electrification" plans, as shown in this slide from Ford's Investor Day presentation.

Source: Ford Motor Company.

Ford said that quite a bit of this spending will be offset by cost reductions:

Ford has plans to achieve cost efficiencies averaging $3 billion annually between 2016 and 2018 and is adding new processes like zero-base budgeting to further its business transformation. These efficiencies will offset the vast majority of costs being added to strengthen Ford's business except for price-related design costs, regulatory costs and the cost to support the development of emerging opportunities -- especially electrification.

The goal: Boost Ford's core business while positioning for the future

The goal of all this: Bottom-line growth -- and, Ford hopes, growth in its share price, too.

Source: Ford Motor Company.

Fields summed up the thought process behind this plan:

During the past six months, we've been focused as a leadership team on building Ford's expanded business model -- with a more clearly defined vision, strategy and roadmap on how to deliver success. We've been making important decisions and have agreed on three key principles to guide future capital allocation: where to play, where not to play and how to win.

Fields' vision of Ford's future is one in which the Blue Oval provides its customers with "personal mobility" in ways that go beyond (but continue to include) traditional vehicle ownership. Future Ford customers will include city-dwellers who use the Blue Oval's services to get around every day, but who don't own a vehicle.

That's a sea change in thinking for a company that until recently was mostly thought of as a builder of cars and trucks. If Ford is able to follow through on the plan, it should be able to thrive as technology transforms the traditional auto business.

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John Rosevear owns shares of Ford. The Motley Fool owns shares of and recommends Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.