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Ford’s ‘confusing’ 2021 forecast hurts action despite explosive first quarter results

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DETROIT – Ford Motor easily exceeded Wall Street expectations for the first quarter despite a continuing global shortage of semiconductor chips resulting in low inventories and plant closings. So why did the automaker’s shares fall 10.4% during intraday trading on Thursday?

The backlash from investors is a mix of issues with the chip issue after Ford announced its results after the closing bell on Wednesday.

While analysts were very impressed with the company’s first quarter performance, which included a record $ 4.8 billion in adjusted pre-tax profit, they were much less impressed, if not confused, by its forecast for the ‘year.

“Let’s just say this: Ford’s 1Q was way ‘too good’ to extrapolate while the rest of the year is ‘too hard’ to extrapolate,” Morgan Stanley analyst Adam Jonas said in a note to investors.

Here are five takeaways from Ford’s first quarter results and forecast for 2021 that investors should know.

Advice

At least three analysts have described Ford’s outlook for the year, which he reaffirmed on Wednesday, as puzzling or confusing.

“While Ford’s 1Q: 21 results were impressive, the company has been somewhat confused … released its financial outlook for 2021, which we believe raises concerns for investors,” said John Murphy, analyst at BofA Global Research.

Joseph Spak of RBC Capital reiterated the comments, adding that the indications were “confusing” and that it was “a little difficult” to know whether the depth of the chip shortage problems is exclusive to Ford. Barclays analyst Brian Johnson described Ford’s operational turnaround “hampered” by its “confusing” directions.

Ford said the chip shortage would cut full-year profits by about $ 2.5 billion – the high end of a previous forecast – before interest and taxes to $ 5.5 billion to $ 6.5 billion. dollars. In February, Ford initially set a forecast of $ 8 billion to $ 9 billion without factoring in the expected impact of $ 1 to $ 2.5 billion from the shortage.

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But forecasts reaffirmed after a better-than-expected first quarter imply weaker results for the rest of the year aside from the chip shortage, analysts said.

Ford CFO John Lawler also described the forecast of $ 8 billion to $ 9 billion before interest and taxes as a “launching pad” for 2022.

Underlying activity

Aside from the impacts of the chip shortage, the company’s results were strong, supported by vehicle price increases linked to the chip shortage.

The Detroit automaker reported net income of $ 3.3 billion, which was its best since 2011, and a record adjusted pre-tax profit of $ 4.8 billion.

Its adjusted earnings per share was 89 cents compared to Wall Street’s expectations of 21 cents based on average estimates compiled by Refinitiv. Its automotive turnover was 33.55 billion dollars against 32.23 billion dollars expected.

Lawler said Ford was able to make up for lost profits resulting from its reduced production in the first quarter by reducing incentives on vehicles sold, prioritizing the production of more profitable vehicles and reducing manufacturing costs. , among other cost reductions. The automaker also benefited from higher profits from its Ford Credit financing arm.

Analyst comments for the first quarter included “too good”, “very impressive” and a “blowout”.

Notably, Ford’s profits outside of North America, by far its strongest market, were $ 454 million, up $ 980 million from the same quarter a year ago. Its North American operations posted a 12.8% profit margin and nearly $ 3 billion in profit to start the year.

“Aided by higher prices, our results benefited from the industry-wide supply and demand imbalance due to the semiconductor shortage,” said Farley. “However, we have also made improvements that will persist over time, including our overall overhaul of our overseas operations which contributed to the largest year-over-year variation in profitability for those operations than we have seen. “

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The company’s warranty costs, which have been extremely troublesome in recent years, have also improved by over $ 400 million from a year ago.

The worst to come

The company estimates that the semiconductor problem will bottom out in the second quarter, with improvement during the rest of the year, but the impacts could continue until 2022.

“There are more whitewater moments ahead for us than we need to navigate,” Farley told investors. “The semiconductor shortage and the impact on production will get worse before it gets better.”

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The company said it now expects to lose 1.1 million units of production this year due to the chip shortage. It also partially produced around 22,000 vehicles, including its Ford F-150 pickup trucks, without a few chips to complete and shipped at a later date.

Farley’s promise

Wall Street will likely continue to monitor whether or not Farley can deliver on his promise to keep vehicle inventories low in North America, which favors profits. A supply of around 60 days is generally considered healthy for the industry, while highly configurable vehicles such as vans are generally higher than this.

Farley told investors on Wednesday that the company will be running lean vehicle inventories in the future: “I want this to be very clear to everyone. We are going to run our business with a lower days supply than we had. in the recent past because it’s good for our business and good for customers. “

While it may seem as simple as producing fewer vehicles, it is not. Automakers must balance supply and demand with dealers, many of whom are clamoring for popular truck and SUV models, as well as its workers.

Recent contracts between Detroit automakers and United Auto Workers provide more flexibility in production, but laying off tens of thousands of factory workers can be costly. There is also an issue of worker retention and maintenance of factories, which can take weeks to restart after being shut down.

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Large trucks and SUVs are among the weakest in the United States, according to Cox Automotive. At the end of the first quarter, full-size pickup trucks had an inventory 48 days below the industry average, a significant drop from 61 days in February. The Ford F-150 was reduced to 56 days of supply, according to Cox.

VE

Morgan Stanley’s Jonas believes Ford’s reclassification potential will depend on its intention to switch from internal combustion engine vehicles, or ICEs, to battery electric vehicles, or BEVs.

“We believe that Ford’s (and its OEM peers) reclassification potential will come down to executing the BEV development pivot strategy while managing the ICE liability depletion,” he said in a note.

Whether or not Ford can boost investor confidence in its EV plans is expected to come up on an Investor Day on May 26.

Farley promised investors that the company will explain how the automaker plans to “lead the electric vehicle revolution in areas where we are strong at Ford.”

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All-electric Ford Mustang Mach-E

Source: Ford

Deutsche Bank reiterated a short-term catalyst buy note on Ford on Thursday in the run-up to capital markets day. It also increased the 2022 earnings per share for Ford by nearly $ 2.

Ford earlier this year announced plans to increase its investment in electric vehicles from $ 10.5 billion to $ 22 billion through 2025. That excludes potential spending on battery factories.

The company announced on Tuesday its intention to “eventually” manufacture its own batteries and cells. However, the company declined to discuss a timeline for doing so.

– UKTN Michael bloom contributed to this report.

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