Shares of Ford Motor Company (F -1.15%) plunged 12% last Tuesday, after the automaker gave investors a disappointing update on its third-quarter performance. Ford cited continued supply chain problems and greater-than-expected cost inflation for the downbeat outlook.
Nevertheless, Ford maintained its bullish full-year guidance. Robust demand should allow the company to pass cost increases through to customers as needed. And with Ford stock trading at a depressed valuation, shareholders have a meaningful margin of safety even if the company has to reduce its medium-term forecasts. As a result, I'm sticking with Ford stock.
What happened
With Q3 almost over, Ford says it expects to report an adjusted operating profit between $1.4 billion and $1.7 billion for the period. That would be well below its second-quarter adjusted operating profit of $3.7 billion, and significantly less than what analysts had anticipated.
Ford attributed the subpar results to two factors. First, due to parts shortages, the company is on track to end the quarter with 40,000 to 45,000 mostly complete vehicles held in its inventory. Ford said that high-margin trucks and SUVs make up the bulk of this unfinished inventory. This could negatively affect the automaker's quarterly operating profit by around $600 million, according to one Wall Street analyst's estimate.
Second, supplier costs have escalated by roughly $1 billion more than previously expected this quarter. High inflation has been driving up suppliers' expenses, and those increases are now being passed through to Ford.
Q4 is still looking strong
Even before the recent update, Ford had anticipated that the third quarter would be weaker than the fourth quarter -- both in terms of volume and profitability -- due to chip supply constraints. The incremental parts shortages experienced recently have simply exacerbated that dynamic.
Importantly, Ford reaffirmed its full-year forecast for adjusted operating profit to range between $11.5 billion and $12.5 billion. Thus, it still expects its earnings for the second half of 2022 to be roughly in line with the $6 billion adjusted operating profit it posted in the first half.
Image source: Ford Motor Company.
Realistically, Ford won't reach the high end of its full-year guidance. It would need to post a record Q4 adjusted operating profit of nearly $5 billion to get there. But on the bright side, even the low end of the full-year outlook implies a Q4 adjusted operating profit of around $4 billion. That would still be one of the strongest quarterly results in Ford's history.
Of course, Ford expects to benefit from selling the 40,000 to 45,000 mostly complete vehicles in its current inventory next quarter. But that doesn't fully explain the projected improvement in its profitability between Q3 and Q4. Clearly, Ford also anticipates that strong pent-up demand will enable it to pass its cost increases through to customers.
No reason to panic
The auto industry has always been volatile. Fluctuations in demand, commodity costs, recalls, and operational issues can significantly affect results in any given quarter or year.
As a result, while Ford's third-quarter guidance update understandably disappointed investors, it isn't a good reason to sell Ford stock. The company remains very optimistic about the fourth quarter. This indicates that management isn't overly worried about the slowing economy and rising costs.
Ford continues to pursue its aggressive Ford+ plan to reduce structural costs while rapidly growing its electric vehicle production capacity. If all goes well, the company says its adjusted operating margin could reach 10% by 2026. That would support annual earnings per share of $3 or more.
Even based on current earnings power, Ford stock trades at a bargain valuation of less than seven times earnings. Considering the company's strong brand, solid future roadmap, and clean balance sheet, that makes Ford stock a steal after its recent tumble.
