Ford Motor Company (F) has been dealing with the United Auto Workers (UAW) strikes. Now, another difficulty confronts the automaker — it recently issued two separate recalls, affecting 273,127 vehicles across the United States. The two models impacted are the 2020-22 Ford Explorer and the Ford Mustang Mach-E.
The larger recall applies to 238,364 Ford Explorers produced between 2020 and 2022. According to filings with the National Highway Traffic Safety Administration (NHTSA) from Ford, a defectively manufactured mounting bolt in the rear axle might snap, potentially resulting in vehicle roll-aways even when parked. The issue stems from this bolt enduring constant bending forces during acceleration, resulting from torque transmission.
If the bolt fails after sufficient vehicular launches, the axle might shift, disconnecting the driveshafts or half-shafts from the integrated powertrain system. If complete separation occurs, the transmission becomes unlinked from the car's wheels, paving the way for possible roll-aways as engaging the park gear would no longer prevent wheel spin.
According to a Ford report, 396 customers reported incidents linked to this problem, often signaled by loud clunking or grinding sounds. Less than 5% of these cases resulted in vehicle roll-away or impaired vehicular control. However, as a remedial measure, F will replace the faulty bolt and implement a re-engineered subframe bushing to ensure correct axle positioning.
The second recall targets 34,763 Mustang Mach-E models fitted with extended-range batteries. This rectification is due to an overheating battery contactor potentially causing a loss of motive power when driving. As per F, this can occur when the vehicle has experienced fast DC charging followed by intense acceleration.
This is the second recall to involve battery contactors on the Mustang Mach-E. Last year, a similar complication led the company to recall 48,924 Mach-E models and replace a diagnostic control module with an alternate model capable of monitoring the battery contactor's temperature. Unfortunately, the initiative did not successfully nullify the issue.
Hence, in this latest recall, F will replace the high-voltage battery junction box at no expense to its customers. The car manufacturer has confirmed that the previous recall has adequately addressed power loss issues affecting standard-range Mach-E units; hence, this recall targets only extended-range versions.
The recall follows an investigation initiated by the auto safety regulator, assessing whether F adequately addressed the issues during the June 2022 recall of about 49,000 Mach-E vehicles.
Implications
F is already grappling with UAW strikes, with predicted impacts of $120 million being realized in the upcoming quarter. As per industry experts, F is losing $44 million daily. Additionally, cuts to F’s future product investments could come if the UAW deal turns out unfavorable. Further, potential reductions in F's future product investment could follow if the UAW deal proves less favorable.
A challenge no company wants to find itself dealing with is product recalls. Recalls can significantly reshape a company's financial landscape, have far-reaching effects on its market performance and negatively impact its reputation.
Under consumer protection laws, manufacturing and supplying companies are required to shoulder full responsibility for the cost of recalling products and any associated costs. Though insurance may cover some costs for defective product replacement, many product recalls result in lawsuits. Considering the accumulated costs from lost sales, replacing faulty units, government sanctions, and legal proceedings, a large recall can quickly escalate into a daunting, multi-billion-dollar predicament.
For example, F's recall of 169,000 vehicles in the United States to replace faulty rear-view cameras and perform software upgrades would take a $270 million toll on the company's finances.
Large-scale organizations such as F can recover relatively quickly from such short-term financial loss. However, diminishing confidence among shareholders and consumers could lead to more severe long-term consequences, such as a marked drop in stock prices. Hence, it would be prudent for F to take measured steps swiftly toward addressing vehicular recalls and safeguard their reputation.
Despite the second-quarter earnings surpassing expectations, these unforeseen expenses could affect the upcoming quarter earnings.
During the second quarter, F’s revenues rose 11.9% year-over-year to $44.95 billion, and automotive revenues peaked at $42.43 billion, surpassing the $40.38 billion estimate. The net income almost tripled to $1.92 billion, marking an 187.4% year-over-year increase.
The automaker anticipates its full-year adjusted EBIT guidance between $11 billion and $12 billion, while its adjusted free cash flow is projected to come between $6.5 billion and $7 billion. The company anticipates to hit an 8% EBIT target by 2026.
Investors' apprehension arises from multiple aspects of the company's earnings and projections. The EV segment of the business, recently rebranded as Model E, reported a pre-tax loss of $1.08 billion. The firm anticipates losses for this segment could mount to $4.5 billion in 2023, a staggering 50% surge on prior predictions.
Additionally, the company has publicly acknowledged the sluggish uptake of EVs, which has led to a scaling back of their previously ambitious production objectives for EVs. The company now expects to hit an annual production capacity of 600,000 vehicles by 2024 instead of 2023 while being “flexible” about the goal of 2 million vehicles it previously forecast by 2026.
Analysts expect F’s revenue and EPS in the fiscal third quarter (ending September 2023) to be $42.51 billion and $0.46, registering 14.3% and 53.8% year-over-year growths, respectively.
Considering these developments, F’s shares have been facing pressures, sending its stock down to May 2023 levels. Over the past year, the stock declined 5% and 8.2% over the past month to close the last trading session at $11.53.
Institutions hold roughly 54.6% of F shares. Of the 1,765 institutional holders, 797 have decreased their positions in the stock. Moreover, 128 institutions have taken new positions (11,202,366 shares), while 132 have sold positions in the stock (10,742,511 shares).
Bottom Line
F has unveiled a bold scheme to invest billions in the advancement of EVs while also returning capital to its shareholders. This plan is predicated on robust revenue streams from its traditional combustion-engine trucks and SUVs portfolio. Given the increasing costs associated with UAW strikes, contract resolutions, and vehicular recalls, these plans seem to be in considerable peril.
To counteract these losses, the automaker could reduce capital spending, delay EV targets, increase cost-sharing initiatives, and make other alterations to its corporate portfolio.
The company experienced negative free cash flow in 2022 and forecasts a similar scenario for this year owing to lofty capital expenditure commitments.
While the company continues offering its shareholders dividends, its history is somewhat mottled. Given the ongoing difficulties, there is an elevated risk of dividend discontinuation or minimization. This eventuality was seen during the pandemic in 2020 and was resumed at the tail-end of 2021. A previous incident occurred before the Green Financial Crisis, with reinstatement happening three years later. This inconsistency may dissuade shareholders from seeking stability in their dividend returns.
Compounding the issues at F is their escalating debt load, which jumped from $105.06 billion in 2012 to nearly $139 billion in 2022. Simultaneously, the firm increased its cash holdings to boost liquidity.
One factor that could entice investors is the relatively low valuation of F. Its forward non-GAAP Price/Earnings of 5.78x is 59.7% lower than the industry average of 14.33%. Also, its forward Price/Sales multiple of 0.28 is 66% lower than the industry average of 0.83.
However, considering the automaker’s tepid price momentum and mixed profitability, it could be wise to wait for a better entry point in the stock.
