Ford Motor Stock (F) tumbled almost 20% last week after the company reported adjusted earnings per share of 47 cents against Wall Street expectations for earnings per share of 68 cents. The bulk of the impact on profitability resulted from increased warranty costs. CEO Jim Farley acknowledged the challenges imposed by the surge in warranty costs but also claimed that the company has made progress toward avoiding a repeat occurrence of this nightmare in the future. Ford had to recall approximately 6 million vehicles in 2023, making it the automaker to recall the most number of vehicles for the third consecutive year. The Q2 performance spooked investors as it was a warning sign of Ford’s continued struggles to improve the quality of vehicles moved out of its production plants.
Why Now?
Ford’s revenue increased 6% YoY to $47.8 billion in Q2 but EBIT margins were substantially impacted by increased warranty costs, which led to a major deterioration of the company’s profitability. Adjusted EBIT for the quarter came to $2.8 billion, down 27% YoY. The adjusted EBIT margin declined by almost 270 basis points to 5.8%, which proved to be a major factor that impacted the investor sentiment toward the company. Elaborating on the increased warranty costs, CFO John Lawler commented that several issues in older models such as rear axle bolt issues and faulty oil pump issues in 2021 and 2016 models led to this massive increase in costs. According to company filings, warranty costs increased by $800 million in Q2 compared to the first quarter.
Looking To The Future
Investors betting on Ford are optimistic that increased warranty costs will not be a major obstacle to growth in the future given that the company has taken several initiatives to mitigate this risk. These measures include investing in advanced quality control technologies, testing new vehicle models rigorously, and upgrading software to identify quality issues at an early stage of development. The company is currently valued at a forward P/E of just 5.7, which makes it one of the cheapest automakers with EV exposure. This attractive valuation makes Ford a steal at these prices, especially for investors with a long-term investment time horizon.
On the other hand, investing in Ford carries the risk of the company never really sorting out its quality issues, which may lead to a major impact on its brand value. In addition, failure to win market share in the EV sector may keep valuation multiples depressed permanently.
Both Dilantha DeSilva and Stocks.News have positions in Ford.
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Dilantha is a former buy-side equity analyst who now contributes to Seeking Alpha, GuruFocus, TipRanks, and ValueWalk. He is the founder of Beat Billions, a premium investment research subscription service on Seeking Alpha’s Marketplace. He has appeared on CNBC and Bloomberg to discuss stock markets and the global economy.