Fords Big Earnings Warning Is Really Good News. Just Ask Wall Street.

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Ford Motor said third-quarter operating income will be below consensus due to parts shortages and inflation.

However, Wall Street doesn't seem to care about Ford (brand: F) or its peers. There are some positives to be drawn from Ford's surprise report.

In a statement Monday, Ford said it would not complete production of 40,000 to 45,000 high-margin trucks and SUVs before the end of the third quarter. This car will be ready by the end of the year.

Ford said the production shortfall, combined with $1 billion in higher-than-expected costs, will hit quarterly operating income by between $1.4 billion and $1.7 billion. Before the update, analysts had expected around $2.9 billion in operating income. Based on the median estimate of Ford's new management, the company's operating profit is about $1.4 billion.

In fact, the size of the losses was not that great. RBC analyst Joseph Spak downplayed this, saying the unwritten tools cost the company about $600 million in operating profit, or about $14,000 each. (For the entire Ford lineup, including low-margin vehicles, operating income per unit for vehicles sold in the first half of 2022 is approximately $3,000.)

That $600 million plus $1 billion in higher costs adds up to $1.6 trillion, more than the Wall Street consensus estimate of $1.4 trillion in losses. The bottom line is that Ford beat expectations in the third quarter by about $200 million under normal operating conditions.

This is only a theoretical possibility. However, despite the disappointing third-quarter news, Ford stood by its previous estimate of $11.5 billion to $12.5 billion in annual operating profit. Given the results of the first three quarters of the year, Ford needs to earn about $4.5 billion to reach this figure in the fourth quarter.

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This would be a great result. Spak is valued at around $3.1 billion, while the Wall Street consensus suggests an operating profit of $3.2 billion.

Spak estimates that adding $600 million in operating profit from Ford's unfinished vehicle losses to its fourth-quarter revenue guidance would bring its forecast to around $3.7 billion, raising the consensus estimate to $3.8 billion. Ford hopes to achieve much more than that, with a strong end to the year.

Citi analyst Itai Michaeli said if Ford sticks to its full-year operating profit forecast in a higher cost environment, Ford should have a much better product range and better prices than expected. The company's ability to retain its drivers also shows the automaker is not facing a demand problem, he said.

Michael isn't sure other automakers are in the same position as Ford when it comes to costs and parts shortages. But Spak wasn't too worried. "We will not be too quick to predict problems for Ford [other automakers]," the analysts wrote in a report released Monday. "Obviously supply remains volatile, but different issues hit automakers at different times."

Both analysts were upbeat on the Ford news, but not on the stock. Spak rates Ford's stock as a Hold with a $15 price target. Michaeli also assigns a hold rating to the stock with a target of $16.

Ford's update surprised no one along the way. No one is upgrading or downgrading their stock or changing their target price.

Overall, 40% of analysts recommend buying Ford stock. This is below average. The average purchase ratio for S&P 500 stocks is around 58%. The average analyst price target is nearly $17 a share.

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Ford shares rose 12.3% on Tuesday to $13.09. The S&P 500 and the Dow Jones Industrial Average were down 1.1% and 1%, respectively. General Motors (GM) shares fell 5.6%. Shares of Tesla (TSLA) fell 0.1%.

Email Al Root at [email protected]

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