Ford Stock EPS Disappoints, Shares Plummet After-Hours

Key Points

• Ford Motor missed big on adjusted earnings per share (EPS) compared to analyst estimates.
• The company was hurt by high warranty-related costs and bad performance from its EV segment.
• The company may be able to right the ship long-term by returning to gas-powered trucks and focusing on more affordable EVs.

Ford Motor NYSE: F is in the consumer discretionary sector and is the third-largest automobile company in the United States by market capitalization. The company reported Q2 2024 financial results on July 24, 2024.

We will examine Ford’s annual filing to better understand its business segments. We will then examine the firm's earnings report. We will finish by providing an outlook on the stock and detailing what Wall Street analysts expect going forward.

Ford’s Business Segments and Sales Channels

Ford divides its business into three segments: Ford Blue, Ford Model e, and Ford Pro. Ford Blue encompasses the firm’s sales of Ford and Lincoln-branded vehicles with internal combustion engines and hybrid platforms to retail customers. It also includes parts and services for these types of vehicles.

The Ford Model e segment accounts for sales of electric vehicles, their associated parts, and services to retail customers.

Ford Pro sells vehicles, parts, and services to commercial, government, and rental customers. Sales of ICE, hybrid, and electric vehicles to these customer types fall within this segment.

Ford's biggest competitors include General Motors NYSE: GM and Stellantis NYSE: STLA. Together, they make up the "Detroit Three" automakers.

Ford's Earnings: Warranty Costs and EV Losses Hurt Operating Income

Ford’s financial results fell woefully below expectations. It reported adjusted earnings per share (EPS) of 47 cents. Analysts expected 68 cents, resulting in an earnings surprise of nearly 31%. However, it beat revenue estimates by $1.9 billion, reaching $47.8 billion.

The company reaffirmed its full-year adjusted operating income guidance at a midpoint of $11 billion and increased adjusted free cash flow guidance by $1 billion to a midpoint of $8 billion. Declining margins resulted in lower earnings on higher revenue. Operating margin fell 270 basis points to 5.8%.

The company sold more vehicles and charged more per vehicle, but higher costs wiped out these gains, causing a drop in operating income. These higher costs came from Ford needing to increase its warranty reserves, which pay for malfunctions in its previously sold vehicles.

The company has had persistent quality control issues over the last several years. In 2022, it issued 65 separate recalls that affected around 8.6 million vehicles, the most of any U.S. automaker. In June 2024, it recalled 550,000 F-150 trucks.

CEO Jim Farley said that the firm is seeing positive momentum in its quality control issues. He noted the firm jumped significantly in JD Power’s Initial Quality Study for vehicles, as well as internal measures of improvement.

Results from the Ford Model e segment continued to disappoint. For every dollar in sales of these vehicles, $2 had to be spent, resulting in an operating margin of -100%. The bright spot was in the Ford Pro segment. There, income grew by 8%. But margins still fell by 20 basis points.

Ford's Short-Term Struggles Likely to Continue

Ford released earnings, and shares plummeted in after-hours trading, dropping over 11% by 5:15 Eastern time.

It is interesting to see that the company did not adjust its guidance for the full year despite these poor results. The company seems to believe that its Ford Pro segment will grow stronger than expected through the rest of the year while Ford Blue will perform worse.

One positive piece of news for Ford is that it is moving away from the idea of electric trucks and favors smaller EVs. Farley said that enormous EVs “are never going to make money." The company plans to introduce a $30,000 electric vehicle in the next couple of years that it believes will be profitable. It is good to see that Ford is realizing its mistake and going back to gas-powered trucks.

In the short term, it is hard to see improved results coming from Ford. The auto industry is very cyclical, and high interest rates only reduce affordability. Additionally, the quality control issues will likely persist in the short run, as the firm’s supposed improvement should be in its newest vehicles. Monitoring its transition back to its core competencies in gas trucks and developing its low-cost EVs is essential to predicting its long-term success.

The range of analyst price targets for Ford is wide. Bank of America recently raised its target to $22, which implies an upside of 61%. This upside is based on Ford’s closing price of $13.67 on July 24. However, others have targets as low as $10.