Ford Cuts Outlook for Finance Arm
November 17 2016 - 3:50PM
Dow Jones News
Ford Motor Co. cut earnings expectations for its finance arm
next year, the latest sign that falling used-car prices are hurting
automotive businesses.
The Dearborn, Mich., auto maker cut Ford Credit's 2017 pretax
profit forecast by $300 million to $1.5 billion amid sliding
auction values on used vehicles, finance chief Bob Shanks told
analysts Thursday.
The used-car values continued falling through September as
vehicles coming off leases flooded back to dealerships. Ford
previously had said it expected its financing arm to earn roughly
the same amount as this year. Mr. Shanks said falling used-car
prices are spreading beyond small cars and crossovers, both
suffering sales slumps amid lower gasoline prices, and now also
affecting larger pickup trucks and sport utilities.
The revised forecast further clouded Ford's financial outlook,
though the auto maker reaffirmed expectations to earn $10.2 billion
in adjusted pretax profits in 2016. Ford in September had lowered
full-year profit expectations by $600 million to account for its
recalling vehicles with faulty door latches.
Last week, rental-car firm Hertz Global Holdings Inc. last week
reported lower third-quarter profits and cut financial projections
amid concerns over falling used-car prices, raising broader
concerns for auto makers and dealers already struggling to match
last year's auto sales record.
Car companies are bracing for a significant influx of used cars
in good condition coming off lease, which could further erode
new-car sales by giving shoppers cheaper alternatives. Leased
vehicles accounted for about 30% of all cars sold in the U.S.
through October, according to J.D. Power.
Unlike vehicles purchased by a buyer using a loan or cash,
leased cars are owned by the finance company—often controlled by an
auto maker—during the term of a lease, which is typically three
years. Pricing is set on the expected value of the vehicle at the
end of the term, but auto makers often subsidize the deal to lower
the monthly payment.
"As an industry, we have to recognize what's happening with all
these vehicles that are coming off lease in the next few years,"
said Mr. Shanks of Ford.
Ford's financing arm is one of the company's most profitable
units and has been growing steadily as the auto industry recovered.
But Ford Credit's operating profit fell 21% in the second quarter,
driven by an increase in auto-loan defaults and deepening losses on
off-lease cars resold at auction for lower values than projected.
Ford Credit results improved in the third quarter but Mr. Shanks
warned the decline in auction values has been sharper than
expected.
GM Financial, the financing arm for Ford rival General Motors
Co., is less exposed to declining used-car prices as it only began
leasing vehicles last year.
This latest cut to Ford Credit's guidance, meanwhile, comes as
the Dearborn, Mich., car maker struggles to keep its profit
momentum going after posting record pretax results in 2015. Ford's
third-quarter profits tumbled 56% compared with the same period in
2015, hurt by hefty recall expenses, weaker U.S. sales and higher
launch costs related to the rollout of a new heavy-duty truck.
Ford expects profits will continue to shrink through next year
due to heavy investment in partnerships and acquisitions related to
its expansion into transportation services.
Write to Christina Rogers at christina.rogers@wsj.com
(END) Dow Jones Newswires
November 17, 2016 15:35 ET (20:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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