On October 27, Ford Motor Company's stock tumbled by 10%, marking its lowest point since January 2021 and a year-to-date decline of over 11%. This performance contrasts sharply with the nearly 8% rise in the S&P 500 index over the same period.
Ford, the largest issuer in the U.S. high-yield bond or "junk bond" market, has an outstanding debt of $72.4 billion. The price of its junk bonds plummeted alongside its stock on Friday.
The primary trigger for this decline was the company's disappointing third-quarter financial results released after Thursday's market close. Both revenue and profit fell short of expectations. Furthermore, due to a strike by the United Auto Workers (UAW) union, Ford withdrew its full-year earnings guidance and postponed its $12 billion investment in electric vehicle (EV) production capacity.
The quarterly report revealed that Ford's total revenue increased by 11% year-over-year to $43.8 billion, slightly below the market expectation of $43.94 billion. Adjusted earnings per share were $0.39, significantly below the anticipated $0.46 but an improvement from a loss of $0.21 per share in the same period last year.
Ford's net profit for the third quarter stood at $1.2 billion, a turnaround from a loss of $827 million in the same quarter of the previous year. The company also faced a $2.7 billion impairment charge related to its investment in the autonomous vehicle company, Argo AI. The strike impacted the quarter's profit by $100 million.
The adjusted pre-tax profit increased by 22% year-over-year to $2.2 billion, better than the previous year's results but below the market's expectation of $2.7 billion. This performance was notably weaker than General Motors' third-quarter operating profit of $3.6 billion.
John Lawler, Ford's Chief Financial Officer, attributed the disappointing results primarily to the UAW strike, which resulted in an estimated $1.3 billion loss in operating profit. The nearly six-week-long strike at multiple key factories led to the production of 80,000 fewer cars and trucks than anticipated.
Moreover, the strike seemed to have a more profound impact on Ford than on General Motors. This could be a reason why Ford was the first major automaker to reach a tentative agreement with the union. General Motors stated that the strike led to a pre-tax profit loss of $800 million, with a weekly impact of $200 million on operating profit. In contrast, Ford's total loss amounted to $1.3 billion, with a weekly profit impact of approximately $400 million.
As a result, Ford withdrew its entire 2023 guidance, including its adjusted profit forecast of $11 billion to $12 billion and its adjusted free cash flow prediction of $6.5 billion to $7 billion. Company executives mentioned that these targets were within reach before the strike began on September 15.
The transition to electric vehicles has been a focal point for Ford. In the third quarter, its EV division, Model E, reported an operating loss of $1.3 billion, more than double the loss from the same period last year, despite a 26% increase in division revenue and a 44% rise in sales.
Analysts noted that Ford lost approximately $37,000 for every electric vehicle sold in the third quarter. Earlier this year, Ford was among the traditional automakers that followed Tesla's lead in initiating a price war for electric vehicles, further exacerbating its already weak per-unit profitability.
Of greater concern, however, is that Ford's cost issues aren't solely related to electric vehicles. Warranty costs for its overly complex traditional models resulted in an additional loss of $1.2 billion in the third quarter.
As U.S. consumers continue to spend, the additional costs Ford bears in its internal combustion engine business might seem less significant. However, as cracks begin to appear in the U.S. economy, these substantial warranty costs could become a new concern for investors, making the company more vulnerable to reversals in new car prices.
