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Ford Boosted Its Second-Quarter Guidance, but What Does It Really Mean?

By John Rosevear - Jun 17, 2021 at 2:30PM

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A reminder that "better" doesn't necessarily mean "good.".

Ford Motor Company (F 0.86%) said that its second-quarter adjusted operating profit will be higher than it had expected, and "significantly better" than its year-ago result, as continued high demand for new and used cars and trucks has kept prices strong. 

The company provided the updated guidance ahead of CEO Jim Farley's appearance at an event hosted by Deutsche Bank on Thursday.

A boost to guidance is usually good news for investors, and that seems likely to be true in this case. But it doesn't mean that Ford hasn't been hurt by the ongoing chip shortage, and it doesn't mean that its quarter will be profitable. Here's a closer look.

A silver Ford F-150 Lightning, an electric pickup truck, with an Airstream camping trailer at a campsite.

Ford said that it has 100,000 reservations for the electric F-150 Lightning. Image source: Ford Motor Company.

Parsing what Ford said about its expectations for the second quarter

Ford said that it expects its adjusted earnings before interest and tax (adjusted EBIT) for the second quarter to be "significantly better" than the $1.9 billion loss it posted on that basis in the second quarter of 2020. 

It also said that it expects the result to "surpass its expectations," meaning the guidance that it gave auto investors with its first-quarter report on April 28.

Back in April, Ford warned that the ongoing global shortage of semiconductors that has disrupted its production lines for months would likely peak in the second quarter, constraining its production to the point where it expected its adjusted operating profit and free cash flow for the quarter to be negative. At the time, it said it expected to recover those losses in the second half of 2021. 

Ford also said that it expects its net income for the second quarter to be "substantially lower" than the surprise $1.1 billion net profit it reported a year ago, when it benefited from a one-time gain of $3.5 billion related to a revaluation of its investment in self-driving start-up Argo AI.

Reading between the lines, I think that Ford is still telling us to prepare for an adjusted-EBIT loss in the second quarter, while reassuring us that it won't be nearly as bad as last year's $1.9 billion hit. 

Why Ford thinks that things are going better than it had expected

Ford said that it has been "seeing improvement" in its automotive business since April 28, despite continuing uncertainty about chip supplies and the ongoing effects on its production. Some of its other costs have been lower than expected, and the combination of high consumer demand and tight supplies has kept pricing strong. 

In addition, it said, strong used-car prices have meant that Ford Credit, the company's financing subsidiary, has been able to recover more money from the off-lease vehicles it sends to auction. 

Orders for Ford's new products are strong

Last but probably not least, Ford provided an update on "reservations" (nonbinding online pre-orders) for several of its latest new models. 

  • Ford has 190,000 reservations for the just-launched full-size Bronco SUV, 125,000 of which have already converted to binding orders.
  • Reservations for the electric F-150 Lightning pickup, which was unveiled last month, have topped 100,000. 
  • Ford also has 36,000 reservations for the Maverick, the new small pickup it revealed last week, and 20,000 reservations for its electric e-Transit commercial van. 
A blue four-door Ford Bronco, an off-road SUV, at Ford's Michigan Assembly Plant near Detroit.

After months of COVID-related delays, Ford began shipping its Bronco SUV on Monday. Image source: Ford Motor Company.

What it all means for Ford investors

I think what Ford is telling us boils down to this: Things are going better than expected, but they're still not great. 

The chip shortage is still disrupting production, but the vehicles that Ford is able to ship are selling for strong prices and generating good margins -- and those strong prices are carrying over into the used-car market, which is helping Ford Credit. Meanwhile, early signs of demand for its upcoming new products are promising, and the Bronco -- which began shipping earlier this week -- is on track to be a hit.

I still believe that Ford is on course for significant profit growth over the next few years. But the chip shortage still has the potential to make for a bumpy ride over the next few quarters, and I think auto investors should set their near-term expectations accordingly. 

John Rosevear owns shares of Ford. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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