Ford falls most in 15 Years as warranty costs erode profit

Recurring quality problems have driven up Ford’s warranty costs for years, but an $800 million spike in the second quarter caught investors by surprise. Ford reported adjusted earnings per share of 47 cents late Wednesday, well short of the 67-cent average estimate of analysts surveyed by Bloomberg.

Shares of the Dearborn, Michigan-based company sank 18 per cent Thursday in New York, their biggest drop since November 2008. That wiped out the 2024 gain for the stock, which is now down more than eight per cent for the year.

“The warranty challenges are frustrating for investors, as they come on the heels of many other warranty issues in past years and at times drag results without warning,” Barclays analysts led by Dan Levy wrote in a research note.

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Last year, Ford spent $4.8 billion fixing customers’ cars, a rate roughly three times higher than the industry, according to Warranty Week magazine, which tracks corporate repair expenses. Early this year, the automaker held some 60,000 redesigned F-150 pickup trucks in lots around Detroit for extra quality checks. Chief Executive Officer Jim Farley said that helped the company avoid 12 recalls and that would be the process going forward for all new models.

Farley said Ford is now “testing vehicles to failure” and running them “at extremely high mileage” to discover quality problems before they reach customers. It will take as long as 18 months to see the benefits of that new process show up in lower warranty costs.

“It makes our quarters lumpy and it’s challenging, but it will reduce warranty over time,” Farley said.

Chief Financial Officer John Lawler called the second-quarter impact a “one time” jump due to quality-related issues for models built in 2021 and earlier. “We can’t read this quarter as the year is coming off track — it’s not,” Lawler said. Second-quarter revenue rose 6.2 per cent to $47.8 billion.

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Ford reiterated its earnings outlook for the year, forecasting profit of $10 billion to $12 billion before interest and taxes. But that includes lower guidance for Ford Blue, the unit that makes gas-powered vehicles and hybrids, due to the quality woes. The automaker now expects Ford Blue to earn $6 billion to $6.5 billion before interest and taxes, down from a previous forecast of $7 billion to $7.5 billion.

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RBC Capital Markets analyst Tom Narayan said Ford’s report was especially disappointing to investors after General Motors Co. earlier this week boosted its profit guidance for the year by $500 million to as much as $15 billion.

Ford has been ramping up production of traditional internal-combustion engine models, including a redesigned version of its top-selling F-150 pickup truck, as mainstream buyers turn away from electric vehicles due to high prices and a spotty charging infrastructure.

Last week, Ford said it will begin building its big Super Duty pickups at a plant in Ontario, Canada, that had previously been slated to produce an electric sport-utility vehicle that the company has delayed by two years. Farley has said Ford’s EV unit, which it projects will lose as much as $5.5 billion this year, is the “main drag on the whole company.”

First Published Date: 27 Jul 2024, 12:19 PM IST