Ford shares slips and take a toll on profit growth due to higher costs, EV unit

Ford's low profit: Ford Motor's shares tumbled over 13 per cent to a near six-month low on Thursday after the automaker missed second-quarter profit estimates, as it struggles with quality-related costs and stiff competition in its EV business.

The Detroit automaker earned an adjusted profit of 47 cents per share, well below analysts' expectations of 68 cents, according to LSEG data. In comparison, General Motors beat earnings targets on Tuesday. Ford's shares dropped 11 per cent in after-hours trading in New York on Wednesday, and its Frankfurt-listed shares fell 8 per cent on Thursday.

Ford is expected to lose about $7.22 billion in market capitalisation at current share price levels of $11.86. Warranty expenses went up $800 million in the second quarter compared with the previous quarter, significantly hurting profits in its Ford Blue combustion and hybrid vehicle business.

Analysts at Piper Sandler cited these 'unwelcome warranty headwinds' as the reason for the stock slump. "Ford referenced quality problems on vehicles from the 2016 and 2021 model years, and to address these concerns, the company is shouldering a higher-than-expected warranty burden," they said.

However, Ford expects the second half of the year to match its warranty cost expectations. Ford CEO Jim Farley has made fixing the automaker's quality problems a priority since he took the helm in October 2020. The company hired a new executive director of quality and transformed some of its production practices to avoid errors, but has still topped the industry in number of recalls.

Legacy automakers have scaled down their EV ambitions amid easing demand, a shift to hybrids, and stiff competition from Tesla and Chinese EV makers in global markets. "For now, shareholders will have to take a good quarterly dividend...and special dividends as compensation for up-and-down results that continued to be hampered by warranty problems and slower launch ramp-ups," said David Whiston, analyst at Morningstar.

Ford has a price-to-earnings (PE) ratio of 6.9 compared to GM's 4.7. So far this year, Ford has risen about 14 per cent, while GM has gained 29 per cent.