The recession could be an excellent entry point for investors, but it still may be a risk
Ford (NYSE:F) shares have fallen 20% to $11 since the automaker’s financial results for the second quarter of 2024. Ford admitted that it had quality-related problems with vehicles manufactured between 2021 and earlier. Investors should wait to see what the company does before buying the stock dip.
Value investors will be tempted to buy some shares. Ford’s 12-month trailing price-to earnings (P/E ratio) is about 11.5, so it is easy to conclude that Ford stocks are cheap.
It’s not wise to buy Ford stock because it appears cheap when there is a critical, unanswered issue: Can Ford regain its reputation as a manufacturer of reliable cars and trucks without high warranty costs?
Ford’s surprising rough quarter
Ford’s surprising rough quarter
Ford’s stock price decline of 20% may seem extreme but it is not unjustified. Ford’s 2024 second quarter results were worse than expected.
Not all the data was bad. Ford’s revenue, in particular, grew 6.2% to $47.8 Billion.
The bottom line results of the automaker were certainly subpar. The operating profit of the company fell by 26% to $2.8 billion. Ford’s $2.8bn operating profit was a big surprise. The lowest estimate of $2.9bn was made by FactSet.
Ford’s adjusted earnings per share of $0.47 fell far short of Wall Streets’ expectation of $0.67 per share. Ford’s stock may be tempting at $11, but it will take a while for the market to digest the negative quarter results and forgive Ford.
High warranty costs due to vehicle quality issues
High warranty costs due to vehicle quality issues
Ford’s vehicle quality is a major issue. The automaker’s warranty-related costs in the second quarter increased by $800 million compared to the first, to $2 billion. This is 4% of Ford sales.
According to Warranty Week magazine, Ford spent $4.8 billion on repairs for its customers’ cars in 2023 (via Bloomberg). This rate is three times higher than the average industry vehicle repair cost.
Jim Farley, CEO of Ford Motor Company, tried to reassure investors regarding vehicle quality. Ford is “testing cars to failure” as well as running them at “extremely high mileage” in order to detect quality issues.
This is not much of a reassurance in the short-term. Bloomberg reports that it could take up to 18 months for Ford to see the benefits from this new process in terms of lower warranty costs.
Farley said that these measures will make the firm’s quarters look “lumpy”, however, they will reduce warranty with time. The stock price has dropped by 20%, which indicates that the market doesn’t have much faith in Ford’s future.
Wall Street experts don’t seem to be putting their hopes in Farley’s prediction of a better tomorrow. Barclays analyst Dan Levy, for example, complained that “the warranties challenges are frustrating to investors, as they follow other warranty issues from previous years and sometimes drag results without warning”.
Mike Ward, an analyst at Freedom Capital Markets, noted that “warranty issues have been growing in Ford over the last five-year period and have escalated in the past year”.
Wall Street seems to want more evidence that Ford has improved the quality of its vehicles.
Ford’s reputation is at stake
Ford’s reputation is at stake
Ford, a giant automaker, has faced many problems throughout the years. This includes the autoworkers’ strikes of last year. It is unacceptable for Ford to continue producing substandard cars, as this will ruin its reputation.
Investors shouldn’t take Farley at his word when he says that the warranty costs will improve. Ford is a “show me story” until this improvement appears in the data. This will take at least another quarter or so. Ford stock should be treated as a dip and not bought until it does.
This site is intended for entertainment only and does NOT offer financial advice.
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