Ford Motor Company plunges 10% and withdraws its full-year profit guidance. The problem is not just electric vehicles. | Earnings Report

On Friday, October 27th, Ford's stock plummeted by 10% to its lowest level in over two and a half years since January 2021. The company has experienced a cumulative decline of over 11% this year, far behind the S&P 500 index's cumulative increase of nearly 8% during the same period.

Ford is also the largest issuer in the US high-yield bond market, also known as the "junk bond" market, with outstanding bonds totaling $72.4 billion. On Friday, the prices of these junk bonds plunged along with the stock price.

This is mainly due to the company's poor third-quarter earnings report, which was released after the market closed on Thursday. Both revenue and profits fell short of expectations. In addition, the company withdrew its full-year performance guidance due to the strike by the United Auto Workers and postponed approximately $12 billion in investments in electric vehicle production capacity.

Ford's third-quarter revenue and profits fall short of expectations, but it turns a loss into a profit compared to the same period last year, weaker than its competitors

According to the financial report, Ford's third-quarter total revenue increased by 11% YoY to $43.8 billion, slightly below the market expectation of $43.94 billion. The core automotive business revenue was $41.18 billion, compared to the market expectation of $41.22 billion. Adjusted earnings per share were $0.39, significantly lower than the expected $0.46 per share, but higher than the loss of $0.21 per share in the same period last year.

Ford's net profit for the third quarter was $1.2 billion, compared to a loss of $827 million in the same period last year. The company also incurred a $2.7 billion impairment charge related to its investment in autonomous driving company Argo AI. The strike had a $100 million impact on the quarterly profit.

The adjusted pre-tax profit increased by 22% YoY to $2.2 billion, which was better than the result when the company was forced to issue a profit warning in the same period last year. However, it was lower than the market expectation of $2.7 billion and significantly weaker than General Motors' third-quarter operating profit of $3.6 billion.

The strike caused a $1.3 billion loss, and the temporary agreement is expected to cost as much as $6.2 billion, leading to the withdrawal of the full-year profit guidance

In response to this, Ford's CFO, John Lawler, stated that the main reason for the poor performance was the strike by UAW workers, which resulted in a loss of approximately $1.3 billion in operating profit. The six-week shutdown of several important factories resulted in the production of 80,000 fewer vehicles than expected.

At the same time, he acknowledged that the underperformance of the financial report was also related to the 50,000 vehicles that were stuck in the factory due to quality issues. "We need to continue to work on improving costs and quality. There are many positive factors in our business, but they have not been fully reflected due to cost and quality issues." Analysts believe that cost and quality issues have been plaguing Ford's operations in recent years.

Moreover, the profit loss caused by the strike seems to have exceeded that of General Motors, which may be the main reason why Ford became the first major company to reach a temporary agreement with the union. General Motors announced this week that the strike resulted in a pre-tax profit loss of $800 million, with a weekly impact on operating profit of $200 million. In contrast, Ford's overall loss amounted to $1.3 billion, with a weekly profit impact of approximately $400 million. Ford has therefore revoked its 2023 guidance, including adjusted earnings of $11 billion to $12 billion and adjusted free cash flow forecasts of $6.5 billion to $7 billion. Company executives said that these targets were within reach before the strike began on September 15.

Ford also refused to disclose how much the temporary agreement with the union would cost in total, but admitted that after raising wages and improving employee benefits, labor costs per new vehicle would increase by $850 to $900, and profit margins would decrease by 60 to 70 basis points. The recovery of approximately 80,000 lost vehicle production due to the strike is also a "huge workload." Deutsche Bank estimates additional costs totaling $6.2 billion.

Ford's progress in transitioning to electric vehicles has been closely watched. In the third quarter, its electric vehicle division, Model E, reported a loss of $1.33 billion, more than double the loss in the same period last year, despite a 26% increase in departmental revenue and a 44% increase in sales.

In the first three quarters of this year, Ford's operating losses in the electric vehicle business totaled approximately $3.1 billion, in line with the official guidance of a $4.5 billion operating loss for the full year in July, but Ford originally expected the division to only lose $3 billion this year.

In addition to shelving the ambitious plan to produce 2 million electric vehicles by 2026, Ford also announced in its third quarter report a delay of approximately $12 billion in new investments in electric vehicle and battery production, citing cautious North American buyers who are unwilling to pay a premium for electric vehicles compared to traditional internal combustion and hybrid vehicles.

Company executives admitted that although the transition to electric vehicles is progressing smoothly, the adoption rate by consumers is slower than expected by Ford and the entire industry. "We will balance the production of gasoline, hybrid, and electric vehicles based on consumer demand."

Ford also emphasized that it will not reduce or abandon spending on the development of next-generation electric vehicles, but will increase electric vehicle production capacity and corresponding expenditures more slowly than previously planned. The construction of a second battery factory in Kentucky, USA will be delayed, but the new electric vehicle manufacturing park in Tennessee will continue as planned.

In July of this year, Ford already postponed its plan to produce 600,000 electric vehicles per year by one year to the end of 2024. During the same period, many traditional giants have become more cautious about the prospects of electric vehicles. For example, Honda will end the development of an affordable electric vehicle model, and General Motors has also abandoned its goal of producing 500,000 electric vehicles by the first half of 2024.

Some analysts pointed out that in the third quarter, Ford lost about $37,000 for every electric vehicle sold. Earlier this year, Ford was the first traditional automaker to follow Tesla's lead in lowering prices and starting an electric vehicle price war, further worsening its already poor unit profitability. What is more noteworthy is that Ford's cost issue is not only related to electric vehicles. The additional warranty costs for overly complex traditional vehicle models resulted in a loss of $1.2 billion in the third quarter:

"When American consumers have the ability to continue to splurge, the additional costs borne by Ford in the internal combustion engine business seem less important.

However, when the US economy eventually begins to show more cracks, the above-mentioned huge warranty costs for Ford may become a new concern for investors, making it more susceptible to the impact of a reversal in new car prices."