In a week when crosstown rival General Motors topped earnings estimates and raised full-year guidance on just about everything positive, Ford Motor Company (F -0.53%) was sinking lower after a disappointing second-quarter result. One of the biggest concerns for investors and analysts was a sharp increase in warranty costs, with Ford leading the U.S. industry in recalls over the past three years.
The good news? Ford claims it has drastically improved quality in recent years. While older models dinged the company's bottom line with warranty costs, we're seeing evidence of Ford's improved quality -- here are the details.
How bad is it?
As mentioned, Ford has led the U.S. auto industry in recalls for three years in a row, with 58 recalls in 2023 affecting more than 6.1 million vehicles. In 2022, Ford recorded 68 recalls affecting over 8.7 million vehicles, and during the first half of 2024, the folks at the Blue Oval find themselves again leading the industry.
Ford Blue, the company's traditional gasoline-powered business, posted $1.2 billion in earnings before interest and taxes (EBIT) during the second quarter, $1.1 billion lower than the prior year's second quarter. The result was driven by $1.4 billion in costs, largely due to higher warranty costs, which spiked $800 million compared to the previous quarter.
These warranty headwinds were primarily quality problems on models from 2016 to 2021, and since Ford CEO Jim Farley took over in October 2020, he's prioritized quality and hired a new executive director of quality. Finally, investors are starting to see results.
Enter J.D. Power
J.D. Power released its 2024 U.S. Initial Quality Study last month and recognized Ford's improvements over recent years. Ford jumped a significant 14 spots to No. 9 on the list of brands with the fewest problems per 100 vehicles. Despite its significant jump, Ford still ranked behind crosstown rival brands Ram, which topped the list; Chevrolet, which checked in second on the list; and Buick, which rounded out the top five.
The study did name the Bronco Sport as the best small SUV for initial quality and noted Lincoln's enhanced performance despite its ranking in the lower third of brands. "We still have lots of work ahead of us to raise quality and reduce costs and complexity, but the team is committed and we're heading in the right direction," said Ford Vice Chair and CFO John Lawler in Ford's second-quarter earnings press release.
What now?
It's clear that Ford needs to make further progress on the quality of its vehicles. This isn't the first quarter that higher warranty costs have cut into the bottom line, and unfortunately, it will take time for these quality improvements to reduce warranty costs. Ford suggested it could take 12 to 18 months to see recent models offset some warranty costs.
Savvy investors would be wise to keep an eye on the remainder of 2024 to see whether or not Ford again leads the industry in recalls as higher-than-anticipated warranty costs continue to eat into profits.
