Key takeaways
- Ford has raised its full-year guidance, with its Q2 earnings beat smashing EPS and sales
- However, widening losses on the fledgling EV division had investors concerned
- Ford shares fell as much as 4.4% during Friday trading
Earnings season is in full swing, but the automaker sector has had a tough race. Ford was the latest in Wall Street’s firing line, with the stock falling despite better-than-anticipated earnings. The Q2 earnings were bolstered by solid pricing and traditional vehicle demand, but red flags were waving at the EV division’s widening losses.
Investors seem to firmly believe that the sector faces upcoming challenges left, right and center. With EV adoption still slow, new car prices up and car loan borrowing at record highs, the likes of Ford and GM are stuck between a rock and a hard place. Here’s what went down and why Ford’s EV dream isn’t to be just yet.
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What was Ford’s earnings beat like?
Ford has raised its full-year guidance after its second-quarter earnings report was much better than expected. The carmaker’s adjusted full-year earnings forecast is now between $11-$12 billion, up from the previous prediction of $9-$12 billion.
For the second quarter, Ford recorded earnings of 72 cents a share from sales of $45 billion, with operating profit arriving at $3.8 billion. These all smashed Wall Street’s expectations, where analysts had predicted earnings per share of 54 cents and operating profit at $3.2 billion, based on sales of $43.2 billion.
The surprise winner was Ford’s commercial division, Ford Pro. Sales were up by a massive 22% from the same time last year to reach $15.6 billion, with operating profit at $2.4 billion – a $1.5 billion increase.
Ford’s traditional business arm, Ford Blue, also performed well: the arm recorded $25 billion in sales, close to a 5% increase from the previous year, though operating profit was down slightly at $2.3 billion.
What’s happened with Ford’s EV division?
There was a fly in the earnings ointment. Despite top EV sellers like the Ford F-150 Lightning and the Mustang Mach-E, the company is struggling with its lofty targets for transitioning to a fully EV company.
Ford’s nascent EV division recorded $1.8 billion in sales and a loss of $1.1 billion – year-ago comparisons aren’t available as the operation is still so new. In the second quarter, the legacy carmaker delivered 34,000 full EV and hybrid vehicles, which is a sizeable increase from the 12,000 units delivered in Q1.
The loss was expected – it takes a lot of money to get started with the EV transition – but what really got investors’ backs up was that Ford now predicts it will lose $4.5 billion on the Model e division in 2023, which is up a hefty amount from its $3 billion loss guidance.
Ford CEO Jim Farley also advised analysts on the earnings call that it would take longer to scale up production than originally planned – Ford is now targeting a 600,000 EV production rate by the end of 2024, not this year. Ford also doesn’t know when it will reach 2 million EVs in production when previously it had touted 2026 at the earliest.
Now, Ford’s focus is apparently switching to hybrid vehicles. “You’re going to see a lot more hybrid systems from us,” CEO Jim Farley confirmed on the earnings call, with a new line of hybrid options apparently coming soon from Ford to meet consumer demand.
Wall Street’s reaction
The shares rose after the positive earnings beat, but the gains didn’t last long. As concerns over the EV losses spread across the investing scene, Ford shares closed 4.4% down on Friday trading. In comparison, the S&P 500 rose by 1.1% on Friday.
General Motors (GM) also released its earnings report last week and suffered a similar plight. Despite recording better-than-expected earnings and raising its full-year guidance for the second time, GM shares fell by 3.5%.
Ford’s share price is up 13.26% this year, whereas GM has seen a 12.5% lift in its stock during 2023.
EV market grows increasingly competitive, losses widen
Even though government targets are in place to transition from gas to electric cars, there’s a maelstrom of factors impacting the widespread uptake of EVs.
High interest rates from the Fed’s battle against inflation have increased the interest on repayments, making new cars more expensive. New data from Edmunds revealed in the second quarter, a record 17.1% of people financing a car purchase were paying more than $1,000 a month, up from 16.8% in the previous quarter.
While it’s possible the worst of the monetary tightening scheme is over and increased tax incentives, that doesn’t translate to good news for automakers. Any price drops could hit the major companies’ bottom lines, with the early warning signs apparent – the Manheim Used Vehicle Value Index declined by nearly 8% year over year in May. However, increased car sales could soften the blow.
There’s also a potential labor headwind with the current worker deal for GM, Ford and Stellantis expiring in September. The new United Auto Workers (UAW) union head, Shawn Fain, promised to take a hard line to protect wages in high inflation. Farley said the negotiations “promise to be challenging” but that the goal is to “build a bridge to the future with our employees based on mutual trust”.
The bottom line
The big car companies cannot sway investors from their decision right now. With labor talks underway, high interest rates impacting consumer demand but then softening prices potentially hitting profits, Wall Street has definitely decided there’s trouble ahead for the industry.
EV adoption will take time, money and a shift in consumer behavior to really take off. Until then, carmakers have to grit their teeth and stay the course. From an investment perspective? It could be an opportunity to buy the dip.
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