Zacks.com Analyst Blog features: Ford Motor Co. (NYSE: F), Wal-Mart (NYSE: WMT), Darden Restaurants, (NYSE: DRI), Weyerhaeuser (NYSE: WY) and Berkshire Hathaway, (NYSE: BRK.B).
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Here are highlights from Tuesday’s Analyst Blog:
Ford Profit Improves $1 Billion
Ford Motor Co. (NYSE: F) showed an $1.04 billion improvement in profit to $1.91 billion or 48 cents per share (before special items) in the third quarter of the year, from $871 million or 26 cents per share (before special items) in the same quarter a year-ago. With this, the automaker outpaced the Zacks Consensus Estimate by 10 cents per share during the quarter.
The improvement in profit was fueled by the strength of Ford’s new products, consistently better performance at Ford Credit as well as a recovery in the North American automotive market.
Total revenues slipped 4.3% to $29 billion, including revenues generated from Volvo cars in 2009. This compared with the Zacks Consensus Estimate of $28.16 billion. However, excluding revenues from Volvo, sales improved $1.7 billion or 5.6% from the third quarter of 2009.
Outlook
In the upcoming quarter, Ford anticipates production level to increase 27,000 units from the prior year to $1.35 million units. For full year 2010, the automaker expects full year industry volume (including medium and heavy trucks) of 11.6 million units in the U.S. and 15 million units in the 19 European markets covered by it.
In 2010, Ford continues to expect its structural costs in the Automotive division to go up by $1 billion on a year-over-year basis in order to support key product launches and other growth plans. Capital spending is expected to be $4 billion as the company continues to focus on its product development plan.
For 2010, Ford expects profits at Ford Credit to be higher than 2009. On the contrary, the company anticipates profits at Ford Credit at a lower level in 2011 compared with 2010 due to the non-recurrence of lower lease depreciation expense and that of reductions in credit loss reserve of the same magnitude as in 2010.
Our Take
We appreciate Ford’s product plans and debt reduction strategy. The benefits from these strategies have already been reflected in the company’s results.
However, we are concerned about the company’s higher structural and commodity costs. As a result, the company retained a Zacks #3 Rank on its stock, which translated to a short-term (1–3 months) rating of Hold.
Case-Schiller: Home Prices Falling Again
Home prices are falling again. This morning, the Case-Schiller Index data for August (actually a three month average of June, July and August) was released. For the month, on a seasonally adjusted basis, the composite 10 city index (C-10) fell 0.17% while the broader composite 20 (C-20) was down 0.28%.
The government has poured huge resources into supporting the housing market. Most notably through the homebuyer tax credit and through the Fed buying up massive amounts of mortgage-backed paper. The covering of tens of billions of losses at Fannie Mae and Freddie Mac are also part of the government effort to prop up housing prices.
For awhile those programs did manage to succeed in stabilizing prices and even caused a slight rebound. Now the government support is fading, and so are housing prices. The effect of the government support can still be seen in the year-over-year data.
More Mortgages to Head Underwater
Also, currently about 23% of all houses with mortgages are “underwater.” As housing prices fall, more and more homeowners are pushed below the waves, and those who are already underwater find themselves even deeper below the waves.
Just being underwater is significant, since being underwater is a necessary, but not sufficient, condition for a foreclosure to happen (if you have any positive equity you are better off selling the home and getting something, rather than letting the bank take it and get nothing, regardless of your cashflow situation).
However, depth matters as well. A house is also a home, and as such, non-economic considerations are important. Few people are going to let the bank take their house just because the mortgage on it is $1,000 more than the house is worth, particularly if they have the cashflow to continue paying the mortgage.
That calculation becomes very different if someone is $100,000 underwater on their home. Add in one or both of the breadwinners in the family being unemployed, and you have a recipe for either foreclosure or people simply walking away from their homes.
For millions, simply walking away is the most rational thing they can do economically. Collectively, though, that causes huge damage to the economy.
New Home Construction Also Hit
In addition, as long as home prices are falling due to a massive excess inventory of existing homes, there is very little reason to be building new homes. Each new home built results in a lot of economic activity.
For starters, it employs construction workers, a group that has been harder hit than any other in the Great Recession, accounting for more than one in four jobs lost. When they have jobs, they are far more likely to go shopping at Wal-Mart (NYSE: WMT) or out to dinner at the Olive Garden, part of Darden Restaurants, (NYSE: DRI). As they do, it means more work for people stocking the shelves at Wal-Mart and cooking the food at Olive Garden.
New houses also use a lot of building materials, most of which are still produced here in the U.S. Thus, homebuilding also supports the jobs of lumberjacks working for Weyerhaeuser (NYSE: WY) and people making roofing materials at Johns Manville part of Berkshire Hathaway, (NYSE: BRK.B).
Normally, residential investment acts as the starter engine for the overall economy. The blown starter engine is the key reason why the main engine of the overall economy just refuses to turn over and we have such a sluggish recovery. Another down leg in housing prices is not going to help the situation. To put it mildly.
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