Ford Motor reported a disappointing second quarter on Wednesday, missing earnings expectations by a large margin as higher warranty costs dented profits. In response to the reoccurrence of those quality issues, we’re downgrading the automaker’s rating and sending its stock back to the penalty box. Automotive revenue rose 6% 12 months over 12 months to $47.8 billion, beating analyst forecasts of $44.02 billion, in line with LSEG estimates. Adjusted earnings per share fell 35% 12 months over 12 months to 47 cents, well below the 68 cent estimate, in line with LSEG data. Adjusted earnings before interest and taxes (EBIT) fell 27% 12 months over 12 months to $2.76 billion, missing expectations of about $3.7 billion, in line with FactSet estimates. Ford Why we own the stock: We’re invested in Ford due to management’s concentrate on exiting loss-making businesses, improving product quality, and quickly shifting production to customer preferences. All of those aspects will result in higher earnings and money flow over time, which in turn results in higher shareholder returns via dividends and buybacks. Competitors: General Motors, Tesla, and Stellantis Portfolio Weight: 2.33% Last Purchase: December 29, 2022 Start: November 24, 2020 Bottom Line It’s been a frustrating quarter for Ford and shareholders alike, with shares down about 11% in prolonged trading Wednesday. That puts the stock on the right track to erase this 12 months’s gains when markets open on Thursday. We went into earnings guidance expecting 1 / 4 that beats expectations after cross-town rival General Motors reported strong results on Tuesday. Plus, we thought Ford would answer the decision and announce a buyback program, because of its strong money flow and one in all the bottom price-to-earnings ratios in your complete S&P 500. However, Ford lost 0-for-2 on Wednesday as an old enemy in warranty costs returned and fell on the blue oval’s feet. A buyback wasn’t within the cards either — despite a pointed query from Morgan Stanley analyst Adam Jonas on the topic — as Ford argues there are many high-yield areas to speculate in. As we have now for months, we’ll proceed to press management to purchase back shares. That’s a disappointing result since the quarter would have been wonderful even without the increased warranty costs, which related to 2021 model vehicles or older. And it’s a fair more unlucky setback because Ford management said in its April earnings call that the corporate had made “real progress” toward its goal of creating higher vehicles. And that is true. Ford mentioned on the conference call that it rose 14 spots to No. 9 in JD Power’s 2024 U.S. Quality Survey. However, these quality improvements apply to newer models. The ghosts of Ford’s substandard past proceed to haunt the corporate, overshadowing a period that ought to have been profitable attributable to demand for internal combustion engine (ICE) and hybrid vehicles and the continued strength of the Pro business vehicle business. With no sign of a buyback and warranty issues resurfacing, we see no other option but to send the stock back to the penalty box, downgrade our rating to three, and reassess this position within the context of the recent broader market sell-off. Quarterly Commentary Ford Blue, which represents the corporate’s gasoline and hybrid vehicles, provided a mixed picture. On the one hand, unit sales rose 3% and revenue rose 7% 12 months over 12 months, beating estimates, because of strong demand for each vehicle types. In the primary half of the 12 months, sales of its hybrid pickups — each the Maverick and F-150 models — grew greater than 3 times as fast because the hybrid segment as an entire. However, profit fell about 50% 12 months over 12 months and fell about $1.3 billion in need of estimates. The fundamental problem? An increase in warranty reserves for older cars. This is just not a brand new phenomenon for Ford. It’s an issue the corporate has struggled with for years, long before CEO Jim Farley took over the reins in 2020. While progress has been made under his leadership, we proceed to be upset that this issue crops up every few quarters or so. This time, management attributed the issue to recent technology, field service actions and inflationary pressures on repairs. Looking ahead, Ford expects technology-related costs to normalize. Sales at Ford Model e, the corporate’s electric vehicle division, delivered weak results. Volumes fell 23% 12 months over 12 months. Revenue fell 37% 12 months over 12 months to $1.1 billion attributable to lower volumes and industry-wide pricing pressures. Operating losses, nevertheless, were barely higher than expected and roughly flat 12 months over 12 months. We haven’t got an issue with the quantity declines because Ford loses money on those cars and capital could be higher deployed elsewhere. Ford understands that. Its recent decision to extend Super Duty truck capability by 100,000 units at a Canadian plant previously dedicated to electric vehicles is an excellent example. The best story at Ford stays Ford Pro, the unit that houses the corporate’s fleet and business vehicles. It delivered one other strong quarter, with volume and revenue up 3% and 9% 12 months over 12 months, respectively. Operating profit rose 7% 12 months over 12 months, beating estimates. While EBIT margins of 15.1% were barely lower than expected, they were still within the mid-teens range of management’s goal. The strong results were driven by demand from business customers for Super Duty trucks and Transit business vehicles. Paid software subscriptions proceed to rise, now at 765,000, up from about 700,000 in the primary quarter. Integrated services revenue is anticipated to grow double-digit in 2024, and management is targeting $1 billion in software revenue next 12 months, a revenue stream with attractive gross margins above 50%. Full-year guidance Despite the second-quarter deficit, the corporate still expects adjusted EBIT within the range of $10 billion to $12 billion. But last quarter, management said the business was trending toward the upper end of the range, and that not appears to be the case. The problem, again, is attributable to higher warranty costs, which forced management to lower its EBIT forecast for Ford Blue to $6 billion to $6.5 billion. Previously, it was $7 billion to $7.5 billion. That’s offset by higher earnings at Ford Pro, which is now expected to generate profits of $9 billion to $10 billion, up from a previous range of $8 billion to $9 billion. Expected Model e losses of $5 billion to $5.5 billion remained unchanged. On a positive note, management raised its adjusted free money flow guidance for the 12 months by $1 billion, to $7.5 billion to $8.5 billion. With $2 billion in money and $45 billion in liquidity at quarter-end, we proceed to consider buying back shares at single-digit price-to-earnings can be an excellent use of money. The company still expects full-year capital spending of $8 billion to $9 billion. (Jim Cramer’s Charitable Trust is long F. A full list of stocks could be found here.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trading alert before Jim makes a trade. After sending a trade alert, Jim waits 45 minutes before buying or selling a stock from his Charitable Trust’s portfolio. If Jim has spoken a couple of stock on television, he waits 72 hours after the trade alert is issued before executing the trade. 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The recent Ford F-150 truck will roll off the assembly line at Ford’s Dearborn, Michigan plant on April 11, 2024.
Bill Pugliano |
Ford Motor reported a disappointing second quarter on Wednesday that missed earnings expectations by a large margin as higher warranty costs dented profits. We’re downgrading the automaker and sending its stock back to the penalty box in response to the reoccurrence of those quality issues.
