Citi analysis: Ford's Q2 disappoints, long-term outlook still positive

Investing.com - Ford Motor Company (NYSE:F) reported its Q2 earnings on Wednesday, falling short of analyst expectations.

Despite the disappointing quarter marked by cost containment issues and unmet expectations for capital deployment, Citi analysts maintain their positive long-term outlook for the automaker.

Citi's Take:

Ford's Q2 results were disappointing due to two primary issues highlighted in Citi's preview. First, cost containment challenges, particularly another substantial warranty hit, impacted the quarter's performance. Second, there were growing market expectations for more aggressive capital deployment, which did not materialize. Even excluding the warranty-related costs, Q2 performance was merely in line with expectations.

However, there were some bright spots:

1. 2024 EBIT Guidance: Ford confirmed its 2024 EBIT guidance, with the strength of its Pro division offsetting the $1 billion warranty-related headwind for Blue.
2. H2 EBIT Guidance: The second half EBIT guidance surpassed FactSet consensus.
3. Free Cash Flow (FCF) Guide: Ford raised its FCF guidance.
4. Software Progress: Advancements in software development were also noted.

Citi analysts emphasized that while Ford has substantial work ahead to address warranty-related issues, this is viewed as a question of "when" rather than "if." The stock is expected to face pressure, but Citi does not consider the quarter's results as changing their overall investment thesis. Consequently, they are reducing their price target to $17 from $18 and maintaining a "Buy" rating.

Estimates&Target Adjustments:

Citi is lowering its EPS estimates due to higher warranty accruals, bringing their 2024 Adjusted EBIT closer to the midpoint of Ford's range ($11.4 billion) from a previous estimate of $12.5 billion. These adjustments also extend into out-year estimates. However, some offset is expected from Ford's SuperDuty capacity expansion. Citi plans to review its model again post the 10Q filing.

The new price target of $17, down from $18, considers these estimate changes and updated balance sheet inputs. Target multiples remain unchanged, reflecting a discount for cost execution risks compared to Citi's General Motors (NYSE:GM) target multiple.

Q2 Rundown:

Ford's Q2 Adjusted EBIT came in at $2.8 billion, missing both Citi and consensus estimates of $3.8 billion and $3.7 billion, respectively. The bulk of this shortfall is attributed to warranty-related accruals at Blue, particularly from continued issues in older model-year vehicles. These accruals represented a $0.7 billion year-over-year drag and $0.8 billion quarter-over-quarter impact. Model-e losses were slightly better than expected, and Pro was in line. Ford confirmed its prior 2024 Adjusted EBIT guidance ($10-12 billion) but no longer expressed a bias toward the high end of this range. The guidance now includes $1 billion in warranty and related costs impacting Blue, offset by strength in Pro, where 2024 EBIT is expected at $9-10 billion.

Read-Through to GM:

Citi analysts do not see any fundamental read-through to General Motors (GM) from Ford's issues, as Ford's cost challenges appear company-specific. Near-term sentiment is expected to favor GM, given its stronger quarter, favorable guidance, buyback momentum, and the upcoming October Capital Markets Day (CMD).