Ford Earnings: Warranty Problems on Older Vehicles Slam Results

Key Morningstar Metrics for Ford Motor

• Fair Value Estimate: $19.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Ford Motor’s Earnings

Ford Motor’s F stock fell more than 11.5% in after-hours trading on July 24, following disappointing second-quarter results. Adjusted diluted earnings per share of $0.47 fell 34.7% year over year and badly missed the $0.68 LSEG consensus. We are not changing our fair value estimate but have lowered our 2024 profit projection, which was mostly offset by the time value of money. Total company-adjusted EBIT fell by $1 billion, or 26.3%, and EBIT margin declined by 270 basis points to 5.8%. This metric significantly trails GM’s 9.3% reported on July 23. Ford’s 2024 adjusted EBIT guidance remains $10 billion-$12 billion.

The profit hit is mostly from a large warranty charge. Vice-chair and CFO John Lawler cited inflationary repair costs and many problems recently surfacing on old vehicles, most notably rear axle bolts in 2021 model year vehicles, failed oil pumps from the 2016 model year, and many other issues. CEO Jim Farley said many of these problems could have been detected at launch, which is why Ford has recently made its launch process more thorough, including testing parts to failure, even if this means holding more vehicles in inventory at quarter-end, which hurts that quarter’s profits and cash flow. The exact warranty charge was not given, but we think it could be around $1 billion.

The warranty issue caused profit at the combustion segment, Ford Blue, to fall 49% to under $1.2 billion, with the segment seeing a $1.4 billion cost increase. Warranty increase was most of this cost variance, but materials for new products also factored in, and the segment’s $500 million positive contribution from volume and pricing could not offset these headwinds. The good news is that now that these warranty costs are accrued, the warranty should not be as big of a problem after this year. Ford showed significant progress in the JD Power Initial Quality Study (ninth in 2024 versus 23rd in 2023). If improvements continue each year, this should reduce warranty costs over time.