FedEx has found a friend in the camp of big, ugly third-quarter financial pre-announcements.
The auto giant Ford warned of a whopping $1 billion profit hit late Monday in the form of higher parts costs, with the company blaming vendor inflation. Ford now sees third-quarter adjusted operating profits in the range of $1.4 billion to $1.7 billion, well below Wall Street estimates for $3 billion.
Somewhat oddly in the face of the major warning, Ford reiterated its full-year operating profit outlook of $11.5 billion to $12.5 billion.
Ford stock dropped on the news, with shares of General Motors and Tesla also dipping in sympathy. Ford's ticker page was the most visited on the Yahoo Finance platform through the early morning.
The mood on Wall Street is that Ford's warning is generally a shocker given relatively upbeat comments on demand and the bottom line when second-quarter earnings hit in late July. Now, the Street is scrambling to mark down profit and valuation estimates on the company.
"Vehicles in transit will be seen as transitory, but surprise inflation is always worrying," said Evercore ISI analyst Chris McNally in a note to clients, adding that he sees Ford's stock trading down to about $13 off the quarterly letdown.
Citi's Itay Michaeli also appeared stunned by Ford's warning. Here's a quick look at his research note.
Price Target: $16
Rating: Neutral (reiterated)
Stock price movement assumed: +14%
Ford's stock likely is in the penalty box near-term, Michaeli suggests.
"Though the Q3 guide-down doesn’t affect fiscal year guidance, the surprise $1 billion headwind + now greater reliance on a strong Q4 will likely weigh on the shares."
But Michaeli doesn't think demand for Ford's vehicles have fallen off.
"Ford’s Q3 guide-down confirms continued supply-chain shortages (Ford cited general supply-chain issues to us) and inflationary pressures, but does not appear to reflect a demand problem. In fact, it appears to suggest better price/mix than previously guided. That said, our initial sense is that the Q3-Q4 walk will lean many to the low-end of Ford’s $11.5-$12.5 billion fiscal year 2022 range (Citi $11.8 billion)."
What Ford's warning means to rival General Motors
"The exact read-through to GM isn’t clear at the moment as it hinges on the degree to which Ford’s guide-down is industry-related or company-specific. Reviewing the three factors noted above: (1) On the 40-45k units, last quarter, GM faced a similar issue while Ford did not, so it’s possible that Ford’s Q3 issue is company-specific though it’s unclear at this point. Regardless, we don’t view this as the biggest area of immediate debate since supply-chain risks are known. (2) On the $1 billion of incremental Q3 costs, this will likely get the most scrutiny as it genuinely comes as a surprise given what we understand are reasonable supplier negotiating lead times and considering Ford’s prior ’22 inflation guidance of $3 billion.
"If GM ends up facing a similar headwind, then, like Ford, it could diminish/eliminate any H2 upside potential stemming from strong price/mix, while also raising questions as to what exactly brought on this seemingly sudden headwind. If GM doesn’t end up facing a similar headwind, then the read to GM from this might actually turn positive on arguably better execution or at least greater conservatism on the cost outlook."
From the Yahoo Finance Live archive: Ford CEO Jim Farley at Monterey Car Week in late August
Farley previously explained why he is splitting the company up internally: It will include one business focused on making electric vehicles and the other on producing gas-powered vehicles.
“I have no idea why other people wouldn’t to it," Farley told Yahoo Finance's Pras Subramanian. "I was watching the company literally struggle; I saw a transmission engineer trying to learn about batteries, [the transformation] was just going to take too much time, we don’t have time, we’re way behind. So to catch up and pass, we need to specialize. … I have no idea how we would make this transition if we didn’t specialize.”