Ford set for worst drop since 2020 as warranty costs hurt profit

Ford Motor Co. shares headed for their worst drop in four years after a big earnings miss that the automaker blamed on a surge in warranty repair costs for older vehicles.

Recurring quality problems have driven up Ford’s warranty costs for years, but an $800 million spike in the second quarter caught investors by surprise. Chief Financial Officer John Lawler called it a “one time” jump due to quality-related issues for models built in 2021 and earlier.

“We can’t read this quarter as the year is coming off track - it’s not,” Lawler said.

Ford reported adjusted earnings per share of 47 cents, well short of the 67-cent average estimate of analysts surveyed by Bloomberg. Second-quarter revenue rose 6.2% to $47.8 billion.

Shares of the Dearborn, Michigan-based company sank 14% in early trading Thursday at 9:09 a.m. in New York. If that decline holds, Ford will be set for its biggest drop since March 2020. The stock had been up 12% this year through Wednesday’s close.

“The warranty challenges are frustrating for investors, as they come on the heels of many other warranty issues in past years and at times drag results without warning,” Barclays analysts led by Dan Levy wrote in a research note.

Last year, Ford spent $4.8 billion fixing customers’ cars. Early this year, the automaker held some 60,000 redesigned F-150 pickup trucks in lots around Detroit for extra quality checks. Chief Executive Officer Jim Farley said that helped the company avoid 12 recalls and said that would be the process going forward for all new models.

Farley said Ford is now “testing vehicles to failure” and running them “at extremely high mileage” to discover quality problems before they reach customers. It will take as long as 18 months to see the benefits of that new process show up in lower warranty costs.

“It makes our quarters lumpy and it’s challenging, but it will reduce warranty over time,” Farley said.

Ford reiterated its earnings outlook for the year, forecasting profit of $10 billion to $12 billion before interest and taxes. But that includes lower guidance for Ford Blue, the unit that makes gas-powered vehicles and hybrids, due to the quality woes. The automaker now expects Ford Blue to earn $6 billion to $6.5 billion before interest and taxes, down from a previous forecast of $7 billion to $7.5 billion.

RBC Capital Markets analyst Tom Narayan said Ford’s report was especially disappointing to investors after General Motors Co. earlier this week boosted its profit guidance for the year by $500 million to as much as $15 billion.

Ford has been ramping up production of traditional internal-combustion engine models, including a redesigned version of its top-selling F-150 pickup truck, as mainstream buyers turn away from electric vehicles due to high prices and a spotty charging infrastructure.

Last week, Ford said it will begin building its big Super Duty pickups at a plant in Ontario, Canada, that had previously been slated to produce an electric sport-utility vehicle that the company has delayed by two years. Farley has said Ford’s EV unit, which it projects will lose as much as $5.5 billion this year, is the “main drag on the whole company.”