DETROIT – Ford Motor easily beat Wall Street's expectations for the first quarter despite an ongoing global semiconductor chip shortage causing low inventories and factory closures. So why are shares of the automaker down by as much as 10.4% during intraday trading Thursday?
The negative reaction by investors is a mix of issues related to the chip problem following Ford reporting its results after the closing bell Wednesday.
While analysts were thoroughly impressed with the company's performance in the first quarter, which included a record $4.8 billion in adjusted pretax profits, they were far less impressed, if not confused, with its guidance for the year.
"Let's just put it like this: Ford's 1Q was far 'too good' to extrapolate while the remainder of the year is 'too challenged' to extrapolate," Morgan Stanley analyst Adam Jonas said in a note to investors.
Here are five key takeaways from Ford's first-quarter results and its 2021 guidance that investors should know about.
Guidance
At least three analysts described Ford's outlook for the year, which it reaffirmed Wednesday, as confusing or puzzling.
"While Ford's 1Q:21 results were impressive, the company somewhat confusingly … communicated its 2021 financial outlook, which we believe is creating some investor concern," Bank of America Global Research analyst John Murphy said in a note.
RBC Capital's Joseph Spak reiterated those comments, adding the guidance was "confusing" and it's a "bit unclear" whether the depth of problems from the chip shortage is exclusive to Ford. Barclays analyst Brian Johnson described Ford's operational turnaround being "dented" by its "puzzling" guidance.
Ford said the chip shortage would slash full-year earnings by about $2.5 billion – the high end of a previous guidance – before interest and taxes to $5.5 billion-$6.5 billion. In February, Ford initially set guidance of $8 billion-$9 billion without factoring in an expected $1 billion-$2.5 billion impact from the shortage.
But the reaffirmed guidance after a better-than-expected first quarter implies weaker results through the remainder of the year outside of the chip shortage, according to analysts.
Ford CFO John Lawler also described the $8 billion-$9 billion guidance before interest and taxes as a "launching pad" for 2022.
Underlying business
Outside of impacts from the chip shortage, results for the company were solid, assisted by vehicle pricing increases related to the chip shortage.
The Detroit automaker reported net income of $3.3 billion, which was its best since 2011, and a record adjusted pretax profit of $4.8 billion.
Its adjusted earnings per share was 89 cents compared with Wall Street expectations of 21 cents based on average estimates compiled by Refinitiv. Its automotive revenue was $33.55 billion versus $32.23 billion expected.
Lawler said Ford was able to offset earnings losses from its lower production in the first quarter through reduced incentives on vehicles sold, prioritizing production of more profitable vehicles and lower manufacturing costs, among other cost reductions. The automaker also benefited from higher profits from its financing arm Ford Credit.
Comments from analysts regarding the first quarter included "too good," "very impressive" and a "blowout."
Notably, Ford's earnings outside of North America, by far its strongest market, were $454 million, $980 million better than same quarter a year ago. Its North American operations recorded a 12.8% operating profit margin and earnings of nearly $3 billion to start the year.
"Aided by higher prices, our results benefited from the industry-wide imbalance of supply and demand given the semiconductor shortage," Ford CEO Jim Farley said. "However, we also delivered improvements that will persist over time, including our global redesign in our overseas operations which contributed to the largest swing in year-over-year profitability for those operations that we've seen."
The company's warranty costs, which have been extremely troublesome is recent years, also improved by more than $400 million from a year ago
Worst to come
The company believes that the semiconductor issue will bottom out during the second quarter, with improvement through the remainder of the year, but the impacts may continue into 2022.
"There are more whitewater moments ahead for us that we have to navigate," Farley told investors Wednesday. "The semiconductor shortage and the impact to production will get worse before it gets better."
The company said it now expects to lose 1.1 million units of production this year due to the chip shortage. It also has partially produced about 22,000 vehicles without chips, including its Ford F-150 pickups, and will complete and ship the vehicles at a later date.
Farley's promise
Something Wall Street will likely continue to watch is whether or not Farley can keep his promise to maintain low vehicle inventories in North America, which assist profits. A roughly 60 days' supply is typically considered healthy for the industry, while highly configurable vehicles such as pickups are typically higher than that.
Farley told investors Wednesday that the company will run leaner vehicle inventories in the future: "I want to make it extremely clear to everyone. We are going to run our business with a lower days' supply than we have had in the recent past, because that's good for our company and good for customers."
While that may sound as simple as producing fewer vehicles, it's not. Automakers have to balance supply and demand with dealers, many of whom are begging for popular truck and SUV models, as well as its workers.
Recent contracts between the Detroit automakers and United Auto Workers provide more flexibility regarding production but having tens of thousands of plant workers laid off can be costly. There's also a matter of retaining workers and maintaining plants, which can take weeks to restart after being shut down.
Large trucks and SUVs have among the lowest supplies in the U.S., according to Cox Automotive. To end the first quarter, full-size pickup trucks had a below industry average inventory of 48 days' supply, down significantly from 61 days in February. The Ford F-150 was down to 56 days' supply, according to Cox.
EVs
Morgan Stanley's Jonas believes the possibility of a rerating of Ford will hinge on its plans to move from vehicles with internal combustion engines, or ICE, to battery-electric vehicles, or BEVs.
"We believe that the potential for re-rating for Ford (and its OEM peers) will come down to execution of the strategy to pivot to BEV development while managing the run-out of the ICE liability," he said in a note.
Whether or not Ford can deliver on increasing investor confidence in its EV plans is expected to come during an investor day on May 26.
Farley promised investors that the company will lay out how the automaker plans to "lead the electric vehicle revolution in areas that we're strong at Ford."
Deutsche Bank on Thursday reiterated a short-term catalyst call buy rating on Ford heading into the capital markets day. It also raised 2022 earnings per share for Ford to close to $2.
Ford earlier this year announced plans to increase its investment in EVs by $10.5 billion to $22 billion through 2025. That excludes potential spending on any battery plants.
The company announced plans Tuesday to "eventually" manufacture its own batteries and battery cells. However, the company declined to discuss a timeline to do so.
– CNBC's Michael Bloom contributed to this report.
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