Ford Motor Company (NYSE: F) shares have fallen more than 20% after the company disappointed with second-quarter results last week. The problems plaguing Ford shares are part of an inherent problem that plagues most automakers. This is a highly cyclical business, and the market rarely gives these companies high valuations.
Given the problems with electric vehicles and warranty coverage, combined with a relatively tepid outlook for auto sales in general in the second half of the year, Ford shares are unlikely to reward investors through 2024. Let’s take a closer look.
Profit is missing out
The big news last week was Ford’s earnings decline. The company reported net income of $1.87 billion in the second quarter, compared to $1.92 billion in the year-ago quarter. According to CNBC, the $0.47 per share profit was a sharp contrast to expectations of $0.68, while total auto revenue came in above expectations at $44.81 billion.
One reason for Ford’s disappointing earnings was tied to reserves set aside for warranty issues. CFO John Lawler said the company was making progress in addressing quality issues, but that it was still a potential problem. The reserves were specifically for vehicles made in 2021 and earlier, but one has to wonder how long this will remain a headache. Ford makes millions of vehicles a year, and warranty issues for quality control could be a recurring problem for some time.
The other big headache here is the electric vehicle segment. Known as “Model e,” Ford’s electric vehicle division lost $1.14 billion in Q2. From a pure sales perspective, this part of the business is strong year-over-year, with total electric vehicle sales up 61% in the second quarter.
Unfortunately, the costs of this segment, combined with weaker-than-expected demand, have made things tough for Ford. The company is still the second-best-selling EV maker behind Tesla, but the associated financial losses are a sour note on what was expected to be a strong segment for major automakers.
A challenging industry
The biggest problem for any automaker, including Ford, is that these stocks typically trade at only 10 to 12 times earnings, so disappointments ultimately lead to downward pressure on the stock. Ford’s disappointing second quarter earnings, followed by a 20%+ share price drop, illustrate this trend perfectly.
According to Cox Automotive, a leading source of industry research, U.S. auto sales, which are incredibly important to companies like Ford, are expected to decline in the second half of the year. As inventory increases, automakers are offering increasing incentives to sell vehicles. Ultimately, this could lead to lower prices. This is a contrast to the high prices we’ve seen in recent years and makes it harder for Ford to grow sales.
Average analyst estimates are for full-year earnings of $1.92 per share. Since Ford hasn’t changed much in its guidance for the year, those estimates would give the stock a forward price-to-earnings ratio of 5.7. On the surface, that might seem attractive to investors. The problem, as noted, is that these auto stocks simply don’t trade at high multiples to earnings.
For Ford stock to bounce back, the automaker will have to surprise in the second half of the year. It won’t be enough to simply meet expectations. I think this is a stock to avoid for now.
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David Butler 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.
Down 21%, What’s Going On With Ford? was originally published by The Motley Fool
