Ford is facing some challenges, but the stock’s drop is a great opportunity to buy for long-term investors.
Having rallied more than 20% in just a few weeks between mid-June and mid-July, shares of Ford Motor Company (F 3.69%) looked primed to fly even higher. Instead, the auto stock suddenly hit a speed bump and ended July down 13.7%, according to data provided by S&P Global Market Intelligence.
Blame Ford’s numbers.
Ford has a big problem
Ford’s second-quarter profits came in below analysts’ expectations, what with its net income falling 5% year over year to $1.8 billion despite 6% growth in revenue. Vehicle recalls and warranty costs are costing Ford billions of dollars and eating into its profits. Meanwhile, Ford’s electric vehicle (EV) business continues to lose money.
Ford’s commercial vehicle division, Ford Pro, reported the highest operating margin of 15%. Its traditional gas-hybrid vehicle division, Ford Blue, reported a margin of only 4.4% in Q2. Worst of all, Ford’s EV segment, Model e, reported a massive operating loss of nearly $1.1 billion.
Ford’s management tried to calm frayed nerves by stating that although higher warranty reserves hit its profitability, the company’s “efforts to lift the quality of new products” have started to pay off. Investors, however, aren’t convinced, given the company’s persistent recalls and warranty issues that are proving costly.
Why Ford stock is a buy now
With warranty expenses exceeding estimates, Ford trimmed its outlook for Ford Blue’s operating profit for the full year. However, it’s a relief that Ford didn’t downgrade its overall guidance and still expects to generate adjusted earnings before interest and tax (EBIT) of $10 billion to $12 billion in 2024.
In fact, Ford raised its full-year adjusted free cash flow (FCF) outlook by $1 billion. Adjusted FCF excludes operating cash flows from Ford’s financial arm and other non-operating items, such as restructuring expenses and pension contributions.
Granted, Ford has plenty of internal challenges to deal with. It must improve the quality and reduce the complexity of its vehicles, cut costs, and turn its EV business around to boost profits. Although the company says most of the warranty issues are with older models and it’s already working on the quality of its new models, it could take between 12 and 18 months before its warranty costs can be offset.
Unfortunately, that means warranty costs could continue to plague Ford longer. But Ford Pro is performing well, and the company has ample liquidity. For patient investors, it’s an opportunity to buy shares of the iconic automaker while they trade at a price-to-earnings ratio of 10 and yield a hefty 6%.
Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.