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A Ford F150 Raptor.
Scott Olson/Getty Images
Ford engine
Shares fell after the company changed – but did not cut – its profit forecast due to parts shortages and cost inflation.
Investors reacted in disgust by selling the shares. But they may have missed a silver lining in Ford’s update (ticker: F): Investors have a much better idea of the company’s incredible trucking business.
Ford stock fell 12% on Tuesday as the
S&P500
fell 1.1% after Ford announced Monday night that third-quarter operating profit would be between $1.4 billion and $1.7 billion. That’s a far cry from the $2.9 billion forecast by Wall Street, but Ford hasn’t changed its full-year guidance. The company still expects to make $11.5 billion to $12.5 billion in operating profit in 2022. Ford will earn just more in the fourth quarter.
A big reason for the third quarter disappointment is 40,000 to 45,000 trucks and SUVs that cannot be completed due to parts shortages. RBC analyst Joseph Spak and Morgan Stanley analyst Adam Jonas estimated in research reports that $600 million in operating profits were lost to partially built trucks.
That means Ford’s most profitable trucks and SUVs generate more than $14,000 in operating profit per vehicle. It’s incredible.
In the first two quarters of 2022, Ford sold about 2 million vehicles and reported adjusted operating income of about $6 billion. That’s an average of $3,000 per vehicle.
It appears that large trucks and SUVs account for the bulk of Ford’s profits. In the United States, Ford has sold about 480,000 F-series trucks and Ford Explorers sold in the first half of 2022. If these vehicles generate $14,000 in operating profit per copy, then Ford loses about $700 per unit for everything the rest.
These are just rough calculations, and the rest of Ford’s business probably isn’t too bad. Probably, less than 480,000 vehicles achieve maximum profits. Ford says that’s Wall Street’s math and he didn’t want to get into profitability per unit.
Having a great truck and SUV business, of course, doesn’t make Ford’s stock any more valuable. It’s still a business. But the way profits are distributed has some implications for investors.
For starters, it underscores the importance of the electric Ford F-150 Lightning to the company. This vehicle will need to hit a high profit bar to ensure that Ford makes money by switching from a company that makes gas-powered vehicles to one that makes electric vehicles.
And that illustrates the opportunity of electric vehicles. Ford wants to sell 2 million electric vehicles globally each year by 2026. That could represent 30-40% of all vehicles sold, when car volumes return to pre-pandemic levels.
If Ford’s EVs prove more profitable than lower-end gas-powered offerings, Ford’s operating profit has room to grow because the mix is important.
Earnings per unit could be high now due to high prices tied to the kind of industry-wide production struggles that have ruined Ford’s neighborhood. Still, if Ford’s trucks maintain above-average profitability in coming years and if Ford makes money selling electric vehicles, the company’s total operating profit could easily exceed $15 billion. . It does not depend on volume growth.
The $15 billion figure is much better than if an investor assumed that all of Ford’s vehicles, whether electric, trucks, SUVs or sedans, earn some sort of average margin from the company. It’s also better than the $11.5 billion that Wall Street expects in 2022 and 2023.
Projecting operating profit based on profits by vehicle type is just one exercise, but it’s good to know where profits are actually generated.
Write to Al Root at allen.root@dowjones.com
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