Why Ford Stock Suddenly Hit a Gear in July

After rising more than 20% in just a few weeks between mid-June and mid-July, stocks Ford Motor Company (F 4.50%) he seemed ready to fly even higher. Instead, auto stocks suddenly hit a speed bump and ended July down 13.7 percent, according to data from S&P Global Market Intelligence.

Blame it on Ford’s numbers.

Ford has a big problem

Ford’s second-quarter profits fell short of analysts’ expectations, with net income falling 5 percent year-over-year to $1.8 billion despite a 6 percent rise in revenue. Vehicle recalls and warranty costs are costing Ford billions of dollars and eating into its profits. Meanwhile, Ford’s electric vehicle (EV) business continues to lose money.

Ford’s commercial vehicle division, Ford Pro, reported the highest operating margin at 15%. Its traditional gas hybrid division, Ford Blue, reported a margin of just 4.4% in Q2. Worst of all, Ford’s EV segment, the Model e, reported a massive operating loss of nearly $1.1 billion.

Ford management tried to calm frayed nerves by saying that while higher warranty reserves hurt profitability, the company’s “efforts to raise the quality of new products” were starting to pay off. Investors, however, are not convinced, given the company’s persistent recalls and warranty issues that are proving costly.

Why Ford Stock Is a Buy Now

With warranty expenses exceeding estimates, Ford lowered its outlook for Ford Blue’s full-year operating profit. Still, it’s a relief that Ford hasn’t downgraded its overall guidance and still expects to generate adjusted earnings before interest and taxes (EBIT) of $10 billion to $12 billion in 2024.

In fact, Ford raised its full-year adjusted free cash flow (FCF) outlook by $1 billion. Adjusted FCF excludes operating cash flows from Ford’s finance side and other non-operating items such as restructuring charges and pension contributions.

Of course, Ford has plenty of internal challenges to deal with. It needs to improve the quality and reduce the complexity of its vehicles, cut costs and transform its electric vehicle business to increase profits. Although the company says most warranty issues are related to older models and that it is already working on the quality of its new models, it could take 12 to 18 months before its warranty costs can be recouped.

Unfortunately, that means warranty costs could continue to plague Ford for a while longer. But Ford Pro is performing well and the company has sufficient liquidity. For patient investors, it’s an opportunity to buy shares of the famous carmaker as they trade at a price-to-earnings ratio of 10 and yield a hefty 6%.