The U.S. automotive industry has seemingly been cursed over the past few years with massive recalls. First, we had General Motors' massive ignition switch issue that led to nearly 30 million vehicles being recalled. The industry continues to deal with a widespread Takata airbag crisis, estimated to have spanned more than 70 million vehicles. And, of course, we have Volkswagen Group's recent diesel emissions scandal, which cost the German automaker more than $18 billion in 2015 alone – and that's not even the final total cost!
With those huge recalls making headlines, it's easy to overlook the smaller recalls -- you know, the recalls that don't reach into the tens of millions -- but as Ford Motor Company (NYSE:F) investors found out recently, that's a bad idea. Here's why investors can't overlook recalls and information about three new probes into Ford vehicles.
A fine line to walk
Automakers deal with recalls on a regular basis -- it's simply part of business. Automakers set aside a predetermined amount of capital to deal with those scenarios as they pop up, so generally the issues won't dent quarterly earnings. However, when costly enough, recalls can be a blow to unsuspecting investors.
That's what happened when Ford announced early last month that its initial late-summer recall of roughly 830,000 vehicles wasn't sufficient, and it would be recalling an additional 1.5 million vehicles. In total, Ford estimates the recall will cost the company roughly $640 million; the development forced management to cut its projected third-quarter pre-tax profit by 40%, and its yearly guidance from $10.8 billion down to $10.2 billion.
Are things about to get worse?
After Ford had already explained third-quarter profits would take a hit due to the costly Super Duty launch – which, for the record, has started rather smoothly – the news of a costly recall was met with exactly zero investor excitement. Then, this week, the U.S. National Highway Traffic Safety Administration announced it was opening a probe into three new potential issues.
One probe will investigate 380,000 Ford Edge SUVs from model years 2011 to 2013, after reports of "door ajar" lights being triggered, causing consumers to question if their doors were properly closing. Another NHTSA investigation will focus on 262,000 2010 Ford Fusion vehicles, looking for possible steering issues; the complaints of faulty steering stem from failures of the power system and were linked to 12 crashes and four injuries, hinting towards a potentially more serious recall if the NHTSA finds it necessary. Lastly, the NHTSA announced an investigation into complaints of brake problems in roughly 282,000 model year 2015 and 2016 F-150s with 3.5-liter engines.
Honestly, at this point, investors have more questions and concerns than answers. It's important to note that these aren't official recalls yet, just investigations -- although the probe into steering issues linked to 12 crashes is concerning. We know this won't impact third-quarter results, but this topic will likely be one of the questions from the analyst community during the quarterly Q&A session. This is just one more concern for investors after a rougher-than-expected third quarter, but also one more reason to tune into Ford's conference call later this month.