Shares slumped after the company turned — but did not cut — earnings guidance due to parts shortages and cost inflation.
Investors reacted with disgust, selling shares. But they may have missed the silver lining on Ford’s update (tape: F): Investors have a better sense of just how great the company’s truck business is.
Ford stock fell 12% Tuesday while Ford stock
Standard & Poor’s 500
It fell 1.1% after Ford announced Monday night that operating profit for the third quarter will range from $1.4 billion to $1.7 billion. That’s a far cry from the $2.9 billion projected on Wall Street, but Ford hasn’t changed its guidance for the full year. The company still expects operating profit in the range of $11.5 billion to $12.5 billion in 2022. Ford will gain more of it in the fourth quarter.
A big cause of disappointment in the third quarter is the 40,000 to 45,000 trucks and SUVs that can’t be finished due to a lack of parts. RBC analyst Joseph Plumber and Morgan Stanley analyst Adam Jonas both estimated in research reports that $600 million in operating profit was lost to partially built trucks.
This means that the most profitable Ford trucks and SUVs earn more than $14,000 in operating profit per vehicle. This is unreasonable
In the first two quarters of 2022, Ford sold nearly two million vehicles and reported adjusted operating profit of nearly $6 billion. That’s an average of $3,000 per vehicle.
Big trucks and SUVs seem to account for the bulk of all Ford’s profits. In the United States, Ford sold approximately 480,000 F-Series trucks and sold Ford Explorers in the first half of 2022. If these vehicles earned $14,000 in operating profit per copy, Ford would lose about $700 per unit to everything else.
These are just rough calculations, and the rest of Ford’s work probably isn’t that bad. Less than 480,000 cars are likely to generate maximum profit. Ford says these are Wall Street accounts and doesn’t want to get into per-unit profitability.
Having a great company own trucks and SUVs, of course, doesn’t make Ford’s inventory more valuable. Still one business. But how profits are allocated has two impacts on investors.
For starters, it highlights how important the Ford F-150 Lightning electric vehicle is to the company. This car will have to generate high profits to ensure that Ford makes money as it transitions from a company that makes gasoline cars to a company that makes electric cars.
Explains the opportunity of electric cars. Ford wants to sell 2 million electric vehicles worldwide each year by 2026. That could be 30% to 40% of all cars sold — when car volumes return to pre-pandemic levels.
If Ford’s electric cars are more profitable than lower-cost gasoline-powered offerings, Ford’s operating profit has room to grow because mixing matters.
Profits per unit may now be high due to higher prices related to the kind of industry-wide production struggles that have devastated a quarter of Ford. However, if Ford Trucks maintains above-average profitability in the coming years, and if Ford makes a profit selling electric vehicles, the company’s total operating profit could easily exceed $15 billion. This does not depend on increasing sizes.
The $15 billion figure is a lot better than if the investor were to assume that all of Ford’s cars—whether electric, trucks, SUVs, or sedans—earn some kind of average company margin. It’s also better than Wall Street’s forecast of $11.5 billion in 2022 and 2023.
Predicting operating profit based on earnings by vehicle type is just an exercise, but it is good to know where the profits are really coming from.
Write to Al Root at email@example.com
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