Tuesday, October 4, 2022
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$1 billion costs surge drives Ford into the red

A few months ago, Walmart surprised Wall Street by downgrading its earnings projection due to the effects of inflation; this week, FedEx issued a recession alert as it anticipated poorer revenue growth and lower earnings for this year and the following year.

Ford shocked investors on Monday with a warning about an unexpected $US1 billion increase in expenses for the three months ending September 30 due to inflation, ongoing supply chain issues, and strong customer demand, after Wall Street had rebounded and closed higher as a result of a late surge.

This Ford news will be unfavourable for the US Federal Reserve, which is considering cutting interest rates during the two-day meeting that began on Tuesday.

The central bank will be informed that cost pressures are eating away at the foundation of the US economy by the supply chain issues and the $US1 billion higher parts bill as a result of inflation.

Additionally, it will inform the Fed that despite its rate increases, which have increased leasing costs (80% of all US vehicle sales are made through leases of up to 7 years), demand for cars made by companies like Ford has not yet been affected.

Any dreams the automaker had of reporting a regular profit for the quarter would be dashed by the additional expenses.

On Monday, Ford stock gained 1.4% during regular trade but fell nearly 4% after trading closed. General Motors, its larger rival, claims that its shares undergo a similar experience, rising by more than 3% during regular trading and falling by more than 2% after hours.

Ford’s difficulties were made worse by the fact that 40,000 to 50,000 automobiles were still unfinished and awaiting finishing touches.

The majority of these are its standard models, high margin sports utility vehicles or pickup trucks like the F-150, which is the most popular car in America.

The business stated that it still targets 2022 adjusted profits before interest and taxes of between US$11.5 billion and US$12.5 billion and that it anticipates finishing the project and delivering the cars to dealers in the fourth quarter. (Since adjusted profits are not often used to gauge profitability, using them here suggests Ford will be incurring a significant amount of additional costs when it releases full-year earnings in February.)

According to Ford, the $1 billion in additional costs resulted from recent talks on third-quarter supplier costs tied to inflation.

It said that as a result, it would forecast third-quarter adjusted earnings before interest and taxes to be between US$1.4 billion and US$1.7 billion. That would suggest a loss after interest and tax (a regular profit basis).

When the automaker releases its third-quarter results on October 26, executives will “give additional dimension regarding expectations for full-year performance,” according to the firm.

Ford is only one of several major automakers dealing with supply chain issues since the coronavirus pandemic initially devastated economies in early 2020.

Demand remained high, followed by persistent problems with part availability, particularly for semiconductor chips.

The world’s largest manufacturer, Toyota, has regularly fallen short of monthly projections for the whole of this year and has lowered its annual vehicle production target to March 31, 2023. (its financial year).

Toyota increased its monthly objective in August from 850,000 to 900,000 vehicles globally for the ensuing three months in an effort to make up with the backlog of orders, particularly from Australia.

Ford is hardly the only US giant, though. GM issued a warning on July 1 that its second-quarter profitability will be impacted by supply chain concerns because it had around 95,000 vehicles in stock that were produced without specific components.

GM reaffirmed its annual guidance at the time and stated that it anticipates “virtually all of these vehicles” to be finished and sold to dealers by the end of 2022.

Ford and GM are both spending a lot of money on new facilities and personnel in preparation for the transition to EVs, batteries, and related infrastructure. An unwelcome and potential roadblock to the transition is the rising price of conventional vehicles.

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