There's no question that a major automaker, such as Ford Motor Company, (NYSE:F) announcing a vehicle recall generates anxiety within its investor base. That's especially true as we're only a year removed from the worst year for recalls in America's automotive history – thanks in large part to General Motors' tragic recalls that accounted for roughly 27 million vehicles in the U.S. alone.
So, it's understandable that last week investors were a little edgy when Ford issued three recalls for 220,000 vehicles in North America. Let's put some context around these figures to better understand what impact this really has on Ford's financials this quarter.
Looking at details
Let's get the facts straight. Ford is recalling 212,911 Explorer SUVs and Police Interceptor vehicles from 2011-2013 model years because of a spring on the interior door handle that may become loose and become potentially unlatched in the event of a side-impact crash. So far, Ford is not aware of any related accidents or injuries.
Next, Ford is recalling 1,725 Lincoln MKT from model years 2013-2015 for a vacuum pump relay issue which has a potential to turn into an underhood fire. Ford said it was aware of two fires, but no accidents or injuries.
Lastly, Ford is recalling nearly 6,500 F-Series Super Duty ambulance vehicles from model year's 2011-2013 because of an exhaust gas temperature sensor that could fail to detect a high temperature condition in the vehicle.
Big deal, or not?
First, it should be clear to investors that Ford's recalls of 220,000 units last week pale in comparison to General Motors roughly 27 million last year, which has cost Detroit's largest automaker more than $4 billion thus far, and potentially more with a potential fine from the Department of Justice looming.
While this Ford recall is fresh in investors' minds, let's remember that just last year Ford had an individual recall that more than quadrupled the recent recall for 220,000. In addition to one of Ford's recalls last year heavily outweighing the recent recall in terms of unit totals, it was also a much more serious recall. Consider that the 1.4 million vehicles recalled in that specific situation last year were for the possible loss of power steering – much more serious, in my opinion, than door handles, vacuum pump relays and sensors.
Now, what type of impact can we expect in terms of sales and financial earnings?
I think one graph that should calm investors down if they're a little anxious, is found at Ford's cross-town rival, General Motors.
Last year investors were extremely worried that GM's recalls would send its vehicle sales spiraling downward much like Toyota's gigantic recall did in 2010. That wasn't the case, in fact it was the opposite, and if GM's tragic recalls failed to impact sales, there's arguably zero reason Ford will feel any negative sales impact.
In addition to little to no impact on Ford's sales, the company has already taken previous financial steps to mitigate these events in terms of bottom-line impact.
Consider that during last year's first-quarter presentation, Ford noted that it would boost its warranty reserves by $400 million because of increasing scrutiny to address recalls and customer complaints. That did have an impact on last year's first-quarter, but because of the steps taken last year, this recall should have no impact on Ford's earnings when reported next month.
"We have seen more recalls at Ford, and across the whole industry, and as that has occurred we have had to look at our reserves and adjusted them," said Bob Shanks, chief financial officer, according to the Wall Street Journal. "It's not related to anything specific; it's based on [warranty] data and what we anticipate could happen."
Ultimately, no Ford investors want to hear about recalls. But, in the grand scheme of things Ford's recent recall of 220,000 sounds far worse than it really is. Investors can expect little to no negative impact on sales, brand image, or earnings this quarter.