Ford Stock Is Still a Buy, Despite Supply Issues. Here’s Why.

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Ford Motor

stock tumbled this past week after the company warned of continued parts shortages, but Wall Street doesn’t seem worried—and neither is Barron’s.

In a Monday disclosure, Ford (ticker: F) said it won’t be able to finish 40,000 to 45,000 higher-margin trucks and sport utility vehicles it had planned to produce by the end of the third quarter. The company said the output shortfall, combined with $1 billion in higher-than-expected costs, would result in a quarterly operating profit of about $1.4 billion to $1.7 billion, well below analyst forecasts for $2.9 billion.

Ford stock, which we recommended in a cover story in November 2020, tumbled 12.3% on the news, though the stock is still up about 35% from when we picked it.

It’s a huge miss, but it also contains slivers of good news. One of the problems is that the vehicles that weren’t produced were more profitable than those that were. Wall Street estimates show that the operating profit on the unfinished trucks and SUVs is about $14,000 each, far better than the average $3,000 margin on the vehicles it sold during the first half of 2022. Put the $600 million for vehicles back in and take away the $1 billion in rising costs, and Ford might have beaten third-quarter expectations by about $200 million in a normal operating environment.

Ford is acting as if it can make those profits up. The company stuck with an earlier forecast for full-year operating profits of $11.5 billion to $12.5 billion. Given its performance in the first three quarters of the year, Ford will need to earn about $4.5 billion in the fourth quarter to hit those numbers. RBC analyst Joseph Spak is projecting about $3.1 billion for the quarter, while the consensus call on Wall Street is for about $3.2 billion in operating earnings.

Citigroup analyst Itay Michaeli says that for Ford to maintain its forecast for full-year operating profits in the face of higher costs, it will have to have a far more favorable mix of products—more trucks and SUVs, fewer sedans—and better prices than he had expected. The company’s willingness to maintain its guidance also shows that auto makers aren’t facing any problems with demand, he says.

Far from it. If Ford’s truck business is really as profitable as the math suggests, it’s one heck of a business. It also points to growth well into the future, as long as the sale of electric versions of its most popular pickups, the F-150s, can meet the high profit bar. The entire truck business ensures that Ford will be making money as it moves from a company that makes gasoline-powered vehicles to one that makes electric vehicles. Down the road, EVs could help boost Ford’s overall profitability if they end up being more profitable than the lower-end gasoline-powered offerings.

The market assumed that other auto makers would have the same issues as Ford—

General Motors

(GM), which we recommended in May, fell 11% this past week—but that may not be the case. “We wouldn’t be quick to extrapolate Ford’s issues to other [auto makers],” wrote RBC’s Spak in a Monday report. “Clearly, supply is still choppy, but different issues impact different auto makers at different times.”

Nor has it changed opinions of Ford. No analyst has downgraded the stock. Spak still rates Ford shares at Hold, with a price target of $15. Michaeli rates shares Hold, as well, with a target price of $16. Still, that’s up 30% from Friday’s close of $12.31.

Ford’s update hasn’t shaken Wall Street, and it hasn’t shaken Barron’s. Its stock is still worth owning.

Write to Al Root at [email protected]