Ford Stock Crashes as Warranty Costs Eat into Profits
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Ford stock is trading over 17% lower in early US price action today after the Detroit automaker missed Q2 earnings estimates on higher warranty costs. Rival General Motors too tumbled earlier this week despite posting better-than-expected earnings for Q2. Here are the key takeaways from Ford’s Q2 earnings and how analysts reacted to the report.
Ford’s consolidated revenues rose 6% YoY to $47.81 billion. Its automotive revenues were $44.81 billion which was ahead of the $44.02 billion that analysts were expecting. Its EPS came in at 47 cents which was way below the 68 cents that analysts predicted.
Ford Misses EPS Forecast on Higher Warranty Costs
The earnings miss was mostly led by higher warranty costs which Ford said was $800 million higher sequentially. Notably, warranty costs have been a legacy issue at Ford and the issue keeps popping up after every few earnings calls.
The current warranty issues are related to models of 2021 model year or older. Ford has been making progress on quality and during the earnings call, CEO Jim Farley pointed out that the company’s rank on the latest J.D. Power’s 2024 U.S. Initial Quality survey rose by 14 points and it jumped from 23rd to 9th position.
In response to a question from Wolfe Research analyst Bruno Dossena on how the company can build confidence about its earnings trajectory amid the recurring warranty issues, Farley pointed to J.D. Power as well as its own internal data that shows it is improving on quality.
Warranty Costs Have Been a Recurring Issue for F
He added, “When you look at the root causes for these issues, and I can go through the hundreds that we go through, it’s very clear that these are issues, many of which we could have caught at launch. And that is what’s happening now at Ford. We have to go through all these launches to find these, and over time, we’re confident they come down.”
In his note, Freedom Capital Markets analyst Mike Ward said, “Warranty has been a growing issue at Ford over the last five years and has escalated over the past year.” He added, “Between 2011 and 2019, warranty averaged 1.6% of revenue but since the beginning of 2022 accruals have averaged 2.9% and exceeded 4% in the second quarter.”
Ford Rules Out Big Buybacks
During the earnings call, Morgan Stanley analyst Adam Jonas asked Ford CEO Jim Farley if he thinks Ford stock offers “good value” to which he replied in the affirmative. Farley said that Ford has “many exciting businesses to invest”, especially in the Pro business.
The question about Ford doing a mega buyback was not unexpected as the company has around $27 billion in cash and cash equivalents on its balance sheet. Also, General Motors has been on a buyback spree as the company tries to capitalize on its low valuations by repurchasing its shares.
General Motors, which announced a $10 billion accelerated share buyback plan last year authorized yet another $6 billion repurchase plan earlier this month. Ford said that it is committed to returning between 40%-50% of its free cash flows to shareholders, and along with the usual quarterly dividend it announced a special dividend of 18 cents per share during its Q4 earnings call earlier this year.
Jonas meanwhile reiterated its overweight rating on Ford stock and pointed to its single-digit PE multiples which are among the lowest among S&P 500 companies.
Ford is Looking at EV Partnerships
During the earnings call, Farley said that “ambition at Ford for partnering on EVs is record level high.” He also listed China and Tesla as the cost benchmarks in the industry. In response to a question on the company’s EV strategy in light of the upcoming US elections where Donald Trump has vowed to end the EV mandate if elected, Farley said, the company won’t change its strategy.
He said, “We believe that the fitness of the Chinese in EVs will eventually wash over our entire industry in all regions. And so, we believe, as a company, even if there were short-term adjustments we can make to a compliance-led lower requirement lineup, we’re not going to approach it that way.”
Chinese EV Companies
Notably, President Joe Biden has quadrupled the tariffs on EV imports from China to a whopping 100%. Many countries fear that cheap EV exports from China will flood their markets and are taking steps to protect their domestic industries.
Like Farley, Tesla CEO Elon Musk has also been all praise for Chinese EV companies and believes the “next Tesla” could be a Chinese company.
Meanwhile, GM stock is also trading lower today amid the pessimism over Ford’s massive earnings miss. Both the stocks have failed to win over markets despite posting near-record profits and generous shareholder handouts.
