Ford Motor Company (F 0.80%) shares are down over 20% after the company disappointed in its second-quarter results last week. The troubles hitting Ford shares are part of an inherent problem facing most automakers. This is a very cyclical business, and the market rarely gives these companies high valuations.
With some problems across EVs and warranty coverage, coupled with a relatively tepid forecast for the second half of the year for auto sales in general, Ford shares are not likely to reward investors through 2024. Let's take a closer look.
Earnings miss
The big news last week was Ford's earnings miss. The company reported net income of $1.87 billion in the second quarter, versus $1.92 billion in the year-ago quarter. According to CNBC, earnings of $0.47 per share drastically contrasted with expectations of $0.68, while overall auto revenue came in above expectations at $44.81 billion.
One of the reasons for Ford's disappointing earnings was tied to reserves set aside for warranty issues. CFO John Lawler said the company was making progress in addressing quality issues, but this remains a potential problem. The reserves were specifically for cars made in 2021 and before, but one has to wonder how long this will remain a headache. Ford makes millions of cars per year, and warranty issues for quality control could be a recurring issue for some time.
NYSE: F
Key Data Points
The other big headache here is the electric vehicle segment. Known as "Model e," the electric vehicle component of Ford lost $1.14 billion in Q2. From a pure sales side, this part of the business has been strong on a year-over-year basis, with overall electric car sales increasing 61% in the second quarter.
Unfortunately, the costs of this segment, coupled with lighter-than-anticipated demand, are leading to a tough situation for Ford. The company is still the second-best-selling EV maker after Tesla, but the associated financial losses are a sour note on what has been expected to be a strong segment for major automakers.
A challenging industry
The biggest problem facing any automaker, including Ford, is that these stocks only tend to trade at about 10 to 12 times earnings, so any disappointments ultimately lead to downside pressure on the stock. Ford's underwhelming earnings in the second quarter, with the subsequent 20%-plus decline in share price, perfectly showcase this trend.
U.S. auto sales, which are incredibly important for companies like Ford, are anticipated to decline in the second half of the year, according to Cox Automotive, a major source of research for the industry. While inventories increase, automakers are offering rising incentives to sell vehicles. Ultimately, this can lead to lower prices. This is a contrast to the high prices we've seen over the last few years and makes it harder for Ford to drive top-line growth.
Image source: Getty Images.
Average analyst estimates are calling for full-year earnings of $1.92 per share. Given that Ford didn't alter much of its expectations for the year, those estimates would give the stock a forward price-to-earnings ratio of 5.7. At first glance, that might seem enticing for investors. The problem, as noted, is that these auto stocks simply do not trade at high multiples relative to earnings.
For Ford shares to regain momentum, the automaker will have to provide surprises to the upside in the second half of the year. It won't be enough to simply meet expectations. For now, I think this is a stock to avoid.
