The downturn might be an amazing entry point for investors – nevertheless it should be a risk
Ford (NYSE:F) stock has slumped 20% to $11 in the times following the automaker’s second-quarter 2024 financial results. Ford admitted to having quality-related issues with vehicles from 2021 and earlier, so investors should wait for further motion from the corporate before considering buying the dip in Ford stock.
The temptation for value investors to grab some shares shall be strong. Ford’s trailing 12-month price-to-earnings (P/E) ratio is around 11.5, so it’s easy to conclude that Ford shares are low cost straight away.
Nevertheless, it’s hasty to purchase seemingly low cost Ford stock when there’s a vital, unanswered query: can Ford regain its repute for producing reliable cars and trucks that don’t incur high warranty costs?
Ford’s surprisingly rough quarter
The 20% slump in Ford stock could appear extreme, nevertheless it’s not entirely unjustified. In any case, Ford’s second quarter leads to 2024 were worse than anticipated.
Admittedly, not all of the information points were bad. Particularly, Ford’s revenue grew 6.2% yr over yr to $47.8 billion.
Nevertheless, the automaker’s bottom-line results were definitely subpar. The corporate’s operating profit fell 26% yr over yr to $2.8 billion. The bottom operating-profit estimate, per FactSet data, was $2.9 billion, so Ford’s $2.8 billion was a significant shock.
Moreover, Ford’s adjusted earnings of $0.47 per share got here in far in need of Wall Street’s call for $0.67 per share. Due to this fact, even when Ford stock at $11 could also be tempting, it could take the market some time to digest the negative bottom-line quarter data and forgive Ford for falling thus far in need of Wall Street’s expectations.
Vehicle quality issues result in high warranty costs
Vehicle quality is a costly issue for Ford. The automaker’s second-quarter warranty-related expenses increased $800 million over the primary quarter to around $2 billion, translating to 4% of Ford’s sales.
Moreover, Ford spent a whopping $4.8 billion fixing its customers’ vehicles in 2023, in accordance with Warranty Week magazine (via Bloomberg). For context, that rate is about 3 times greater than the industry average vehicle-repair cost.
CEO Jim Farley tried to reassure investors about vehicle quality. He assured that Ford is currently “testing vehicles to failure” and running them “at extremely high mileage” to detect quality-related issues.
That’s not much reassurance for the short term, though. Per Bloomberg, it’s going to “take so long as 18 months to see the advantages of that recent process show up in lower warranty costs” for Ford.
Farley added that these measures make the firm’s quarters “lumpy”, but that it’s going to reduce warranty over time. Nevertheless, judging by the 20% drop in stock price, the market hasn’t put much faith in the idea that things will only get well for Ford.
In reality, it looks like Wall Street experts aren’t pinning their hopes on Farley’s assumption of a greater future. As an example, Barclays analyst Dan Levy complained that “the warranty challenges are frustrating for investors, as they follow many other warranty issues in past years and at times drag results all of sudden”.
Similarly, Freedom Capital Markets analyst Mike Ward observed that “warranty has been a growing issue at Ford during the last five years and has escalated over the past yr”.
Thus, it seems that Wall Street wants more evidence of Ford’s vehicle-quality improvement.
Ford’s repute at stake
A large automaker like Ford has handled many problems through the years, including last yr’s autoworkers’ strike. Nevertheless, persistently substandard automobile quality is unacceptable, as it’s going to damage the firm’s repute if it continues.
Due to this fact, investors shouldn’t just take Farley’s word for it when he implies that the warranty-cost situation will improve. Until this improvement shows up in the information, which is able to require at the least one other quarter or two, it’s smart to treat Ford as a “show-me story” and Ford stock as a dip that shouldn’t be bought yet.