DETROIT – Ford Motor slightly exceeded Wall Street expectations for the first quarter despite an ongoing global semiconductor die shortage that resulted in low inventory levels and factory closures. Why did the automaker’s shares fall as much as 10.4% during Thursday’s intraday trading?
The negative reaction from investors is a mix of issues related to the chip issue after Ford reported its findings after the closing bell on Wednesday.
While analysts were impressed with the company’s performance in the first quarter, which included record earnings of $ 4.8 billion before tax, they were far less impressed, if not confused, with the forecast for the year.
“Let’s just put it this way: Ford’s 1Q was way too good to extrapolate while the rest of the year is too difficult to extrapolate,” said Adam Jonas, an analyst at Morgan Stanley, in a statement to investors.
Here are five key takeaways from Ford’s first quarter results and 2021 outlook that investors should know about.
At least three analysts described Ford’s outlook for the year, which he reiterated on Wednesday, as confusing or puzzling.
“While Ford’s 1Q: 21 results have been impressive, the company has been somewhat confusing … its financial outlook for 2021, which we believe is causing some investor concern,” said John Murphy, an analyst for Bank of America Global Research , in a note.
RBC Capital’s Joseph Spak reiterated those comments, adding that the guidelines were “confusing” and that it was “a bit unclear” whether the depth of the chip shortage problems was exclusive to Ford. Brian Johnson, an analyst at Barclays, said that Ford’s operational turnaround was “hampered” by his “puzzling” guidance.
Ford said the chip shortage would cut annual earnings by about $ 2.5 billion – the high-end of an earlier forecast – before interest and taxes to $ 5.5 billion to $ 6.5 billion. In February, Ford initially set a forecast of $ 8 billion to $ 9 billion, ignoring the expected impact of the $ 1 billion to $ 2.5 billion shortage.
The reaffirmed forecast after a better than expected first quarter implies, according to analysts, weaker results for the rest of the year outside of the chip shortage.
John Lawler, CFO of Ford, also referred to the forecast of 8 to 9 billion US dollars before interest and taxes as the “launch pad” for 2022.
Aside from the impact of the chip shortage, the results for the company have been solid, aided by vehicle price increases related to the chip shortage.
The Detroit automaker reported net income of $ 3.3 billion, its best since 2011, and record adjusted pre-tax profit of $ 4.8 billion.
Adjusted earnings per share were 89 cents, compared to Wall Street’s expectations of 21 cents based on Refinitiv average estimates. Automobile sales were $ 33.55 billion versus $ 32.23 billion.
According to Lawler, Ford was able to offset the lost revenue from its reduced production in the first quarter with lower vehicle sales incentives, prioritizing production of more profitable vehicles and lower manufacturing costs, among other things. The automaker also benefited from higher profits from its Ford Credit funding arm.
Analyst comments on the first quarter included “too good,” “very impressive,” and a “blowout.”
Specifically, outside of North America, by far the strongest market, Ford posted profits of $ 454 million, $ 980 million more than in the prior-year quarter. The North American operations started the year with a profit margin of 12.8% and a profit of nearly $ 3 billion.
“With higher prices, our results benefited from the industry-wide supply and demand imbalance in the face of semiconductor shortages,” said Farley. “However, we also made improvements that will continue over time, including our global redesign of our overseas operations, which contributed to the largest year-over-year increase in profitability for the activities we observed.”
The company’s warranty costs, which have been hugely problematic in recent years, also improved more than $ 400 million from the previous year
Worst to come
The company expects the semiconductor problem to bottom out in the second quarter and improve as the year progresses. However, the effects could continue through 2022.
“We have more whitewater moments to navigate,” Farley told investors. “The semiconductor shortage and the impact on production will get worse before it gets better.”
The company now expects a loss of 1.1 million production units this year due to the shortage of chips. It has also partially produced around 22,000 vehicles, including its Ford F-150 pickups, with no need for some chips to be completed and shipped at a later date.
Wall Street will likely continue to watch to see if Farley can deliver on his promise to keep vehicle inventories low in North America, which supports profits. A supply of around 60 days is typically considered healthy for the industry, while highly configurable vehicles like pickups are typically taller.
Farley told investors on Wednesday that the company will have leaner vehicle inventories going forward: “I want to make it clear to everyone. We’re going to run our business with less daily supply than we have in the recent past because that’s good for our company and good for customers. “
It may sound as easy as producing fewer vehicles, but it isn’t. Automakers need to balance supply and demand with dealers, many of whom are begging for popular truck and SUV models, as well as with their workers.
Recent contracts between Detroit automakers and United Auto Workers offer more flexibility in terms of production, but laying off tens of thousands of factory workers can be costly. It’s also about keeping staff and servicing equipment, which can take weeks to restart after shutting down.
Large trucks and SUVs are among the lowest shipments in the United States, according to Cox Automotive. As of the end of the first quarter, full-size pickups had 48 days of inventory, which was below the industry average, compared to 61 days in February. According to Cox, the Ford F-150 was only on sale for 56 days.
Morgan Stanley’s Jonas believes the potential for a re-evaluation of Ford depends on its plans to move from internal combustion (ICE) vehicles to battery electric vehicles, or BEVs.
“We believe the potential for re-evaluation for Ford (and its OEM counterparts) will be in the implementation of the strategy to move to BEV development and address the ICE liability leak,” he said in a note.
Whether or not Ford can build investor confidence in its EV plans is expected on an investor day on May 26th.
Farley promised investors that the company will demonstrate how the automaker will “lead the electric vehicle revolution in areas where we at Ford are strong.”
All-electric Ford Mustang Mach-E
On Thursday, Deutsche Bank confirmed a short-term catalyst call buy rating for Ford on the way to Capital Markets Day. It also increased earnings per share for Ford near $ 2 for 2022.
Ford earlier this year announced plans to increase its EV investments by $ 10.5 billion to $ 22 billion through 2025. This eliminates the potential expense for battery systems.
The company announced plans on Tuesday to manufacture its own batteries and battery cells “someday”. However, the company declined to discuss a timetable for this.
– CNBC’s Michael Bloom contributed to this report.