What happened
October was one of the best months this year for Ford (F 0.27%), as the automotive stock clocked 19.4% gains in the month, according to data provided by S&P Global Market Intelligence. Despite rising inflation and deepening fears of a recession, investors saw an opportunity to bet on Ford stock after its September slump, especially with earnings around the corner.
So what
Much before earnings, Ford had already warned investors about lower sales volumes and higher costs in the third quarter as it grappled with a shortage in the supply of parts. Ford stock plunged by double-digit percentages after the warning, but that slump also set the base for Ford's rally in October.
Ford reported a big loss for its third quarter and also trimmed its adjusted earnings before interest and tax (EBIT) guidance for the full year. Yet although the market initially reacted negatively to Ford's numbers, it soon realized there was no reason to panic. The thing is, Ford decided to shut down its autonomous vehicle technology company, Argo AI, to focus on in-house self-driving technologies, and recorded a $2.7 billion noncash, pretax charge on Argo AI, which eroded its bottom line in Q3.
That said, Ford is still seeing strong demand and grew its revenue by 10% year over year in Q3. The biggest takeaway, though, is that Ford expects supply challenges that have plagued the industry and the company for several quarters now to ease in the coming months. In fact, investors in auto stocks even got a glimmer of hope from Europe last month when new-car sales in the region rose for the second straight month in September after 13 consecutive months of decline.
In another significant industry development, the European Union reached a deal in October to ban new combustion-engine cars from 2035, according to Bloomberg, effectively paving the way for growth for the electric vehicle (EV) industry. Europe is Ford's second-most important market, and the company is betting billions of dollars on EVs to grow its EV fleet and sales exponentially over the next five years or so. Ford's EVs -- comprising the F-150 Lightning pickup truck, E-Transit electric van, and Mustang Mach-E -- are already selling out, with its overall EV sales zooming 120% year over year in October.
Now what
Although it wasn't a great quarter, Ford's revenue growth amid the supply challenges and its Argo AI move in Q3 spoke to the robust demand for Ford's vehicles and management's focus on growth areas. With Ford also expecting to grow its adjusted EBIT by almost 15% in 2022 despite a guidance cut, investors wasted no time in buying Ford stock, especially after its steep fall in the previous months.
