Ford faced with stifling warranty costs, bloated inventory, and price pressures

Faced with stifling warranty costs and increased pricing pressure, Ford’s (NYSE:F) most recent quarterly results left Wall Street unimpressed and the stock at its lowest level in seven weeks. Shares opened on Tuesday with a loss of more than 8% as Wall Street struggles to see the “silver lining” from Ford’s Q3 results.

“Consensus will likely continue to fall as Ford needs to show more progress on factors within its control – specifically inventory reduction and cost improvement,” Morgan Stanley’s Adam Jonas said in a note to clients.

“Clearly, our strategic advantages are not falling to the bottom-line the way they should. Costs, especially warranty has held back our earnings power,” Ford CEO Jim Farley conceded on the earnings call with analysts.

The struggling electric vehicle division was another drag on profitability even as the company cut its loss per vehicle to ~$38K. Ford Model e reported a wider EBIT loss of $1.2B on a corresponding decline of 33% in revenue from a year ago. Despite $500M of cost improvement year-over-year, profitability for the EV sector was hamstrung by industry pricing pressures and sluggish demand in Europe. The challenges kept Ford (F) from committing to lower EV losses into FY25 but were not isolated to just the EV division.

The cut in FY24 EBIT guidance to $10B versus earlier estimate of $10B-$12B comes with lowered guidance in the Ford Blue EBIT guidance and Pro EBIT guidance, the second consecutive cuts in these segments. Wells Fargo’s Colin Langan suspects Wall Street’s reaction to the lowered guidance is moderated by already lower expectations given the high U.S. inventory levels.

Performance relative to its closest Detroit peer, General Motors (GM) is particularly notable, Jonas adds. “Beginning with bloated inventory, competitive price pressures and continued elevated costs, we see scope for FY25 consensus expectations to potentially fall materially.

By comparison, GM (GM) – also dealing with an anemic EV division – raised its profit forecast and adjusted free cash flow as the automaker continues to lower costs and consolidate its EV operations. Vertical integration gives GM (GM) a major competitive advantage by driving down costs and generates significant manufacturing credits at both the cell and module level that GM CEO Mary Barra believes “will take years before our competitors reach this level of performance.”

This is evidenced in the stock performance of Ford (F) and General Motors (GM) as Ford shares are down 14% year-to-date versus a 44% increase YTD in GM. By comparison, the S&P 500 is up 22% for the year.

Analysts are mixed on Ford (F) as Seeking Alpha authors rate the stock as a Buy, while Wall Street analysts view Ford (F) as a Hold. Seeking Alpha’s Quant Rating views Ford (F) also as a Hold.