Seasonality – a Note Sponsored by Ford

One of the things that we often think through when analyzing a company is the effect that seasonality might have on a company. The recent earnings note by Ford drives home this point.  The company reported that overall sales dropped 2%, largely attributed to a frigid February.  (Side note: confirmed.  February has been frigid.)

So this brings up two points: first, how big of an impact is being off 2% on revenues?  Well, depending on margins, that can be huge.  In a notoriously low margin business, missing the sales number can have an outsized impact on earnings.

Second, we are always going on and on about looking at full year periods in valuation work.  Part of the reason for this is to shed issues attributed to seasonality.  While Ford may have experienced a particularly bad February, but looking at full year periods we can shed the effects that focusing on tighter periods might have.

Tangent to this is the concept of looking at year-over-year data.  While looking at sales from the previous month or quarter can give a directional indicator of performance, it’s also important to look at the same period in the previous year to account for seasonal effect (be they weather related, holiday related, or something else).