Why Ford's Earnings Were Better Than Expected

Auto investors had a pleasant surprise when Ford Motor Company (F 0.69%) reported its second-quarter earnings on July 29: a nice profit. While the effects of the global semiconductor shortage had Wall Street expecting a loss of about $0.10 per share, Ford instead managed a tidy profit of almost $600 million, or $0.13 per share. 

How did Ford beat estimates by that much? In this Motley Fool Live video, recorded on Aug. 5, Industry Focus host Nick Sciple and Motley Fool senior auto specialist John Rosevear dug into the details and found that the answer had a lot to do with supply and demand. 

A transcript is below the video. 

Nick Sciple: Maybe we can move on to Ford earnings. John, one of the other things you wanted to talk about today as we've seen, big auto across-the-board report earnings over the past week and a half, two weeks, we'll talk about General Motors, we'll talk about Ford, BMW, maybe some others. But let's start here with Ford had a pretty positive response to earnings back in late July. It's traded down a little bit since then, what were the big themes to pull out from Ford's earnings report?

John Rosevear: Well, I mean, people were expecting a not so good quarter because Ford has been, and let's back up to refresh our memory there's an ongoing global shortage of semiconductors, computer chips, particularly the simpler, older style computer chips that autos are full of that control little things. This is not the latest cutting-edge silicon in a new iPhone. This is older technology stuff that is still very useful that automakers like because it's rugged and proven and they know it'll last 10-15 years in a car which has a harsh environment. There's been a shortage of that kind of computer chip, and it has really disrupted production for a lot of automakers. Ford has been hit harder than some. They've had to cut a lot of production which is really unfortunate given that they have a brand-new version of their F-150 pickup, that would be in very high demand if they can build them that fast, and so forth. Wall Street was expecting a not-very-good quarter, perhaps even a loss. Ford came in with a profit on an adjusted EBIT basis, which is what we all watch. They made a profit of $1.1 billion versus a loss of $1.9 billion in the second quarter of 2021. Of course, a lot of the factories that, that shutdown from COVID, their margins were not quite as high as we'd like and so forth. But it was a respectable quarter and it was again better than Wall Street expected and the story there is that, yeah, we're not selling as many cars and trucks as we want, but that's true of everybody. There's a shortage, there's very high consumer demand. We're not offering very much in the way of incentives, we're getting full price for these, and that is doing great things for our margins.

Sciple: Yeah, John. This reminds me, I tweeted something out about this a few weeks ago. I went with my then fiance, now wife, we have since been married, to go get some repairs done on her car. We were in the Honda dealership, and all across the dealership, they had in these little plastic display things, articles from like Car and Driver and things like that talking about, "There is this big car shortage," and the translation is, "Listen, we got the cars that we have, we're going to sell them to you for the price that we name, and if you don't want it, good luck finding another one." It sounds like that's some of what you were describing here, John. It is, "Listen, the cars that are out there, people are going to have to pay what they have to pay."

Rosevear: Ford is actually, I think this is a temporary situation because of the chip shortage, but they've actually lost pickup truck market share because GM has been able, for whatever reasons with its suppliers, to build somewhat more pickups and get them out there. But everybody is selling cars, trucks, SUVs at full boat prices if not market prices, because I know some of the dealers are doing well off this, the automakers hate that, but [laughs] dealers are independent businesses, they can price things the way they want. But where the automakers are saving money is they don't have to do the incentives. There are still incentives out there for a few things, but they're nothing like what we would expect to see in normal times, even normal growth economy times, and that is putting a lot of points on margin.

Sciple: Yeah. When demand is very strong relative to supply, you don't have to do a lot to sell what you have out there.