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Tuesday, November 29, 2022

Ford’s profit warning shows that the truck business is strong. EVs can make it better.

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A Ford F150 Raptor.   Scott Olson / Getty Images

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Stocks tanked after the company relocated — but parts shortages and cost inflation didn’t cut earnings guidance.

Investors reacted with disgust by selling the stock. But they may have missed a silver lining in the Ford (ticker: F) update: Investors have a better understanding of just how amazing the company’s truck business is.

Ford stock fell 12% on Tuesday while


S&P 500
That dropped 1.1% after Ford announced Monday evening that third-quarter operating profit would be in the range of $1.4 billion to $1.7 billion. That’s a far cry from Wall Street’s estimated $2.9 billion, but Ford didn’t change its full-year guidance. The company still expects to generate operating profit of $11.5 billion to $12.5 billion in 2022. Ford will earn more than this in the fourth quarter.

A major reason for the third quarter’s disappointment is the 40,000 to 45,000 trucks and SUVs that could not be liquidated due to shortage of parts. RBC analyst Joseph Spak and Morgan Stanley analyst Adam Jonas both estimated in research reports that $600 million in operating profit was lost from partially built trucks.

That means Ford’s most profitable trucks and SUVs are earning more than $14,000 in operating profit per vehicle. this is incredible.

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In the first two quarters of 2022, Ford has sold approximately 2 million vehicles and reported adjusted operating profit of approximately $6 billion. This averages out to $3,000 per vehicle.

It seems that the big trucks and SUVs make up the bulk of all Ford’s profits. In the US, Ford sold approximately 480,000 F-Series trucks and Ford Explorers in the first half of 2022. If those vehicles make $14,000 in operating profit per copy, Ford loses about $700 per unit for everything else.

It’s just rough math, and the rest of Ford’s business probably isn’t that bad. Chances are that less than 480,000 vehicles make maximum profit. Ford says it’s Wall Street math and it didn’t want to come in at a profit per unit.

Of course, having a good truck and SUV business doesn’t make Ford stock more valuable. It is still a business. But how profits are allocated has some implications for investors.

For starters, it highlights how important the electric Ford F-150 Lightning is to the company. That vehicle would have to meet a higher profit bar to ensure that Ford is making money as it moves from a company that makes gasoline-powered vehicles to one that makes electric vehicles.

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And it reflects the opportunity from EVs. Ford wants to sell 2 million EVs worldwide every year by 2026. This could be 30% to 40% of all vehicles sold – when car volumes return to pre-pandemic levels.

If Ford’s EVs become more profitable than the lower-end gasoline-powered offerings, there’s room for growth in Ford’s operating profit because the mix matters.

Per-unit profit could now be higher due to higher pricing related to the industry-wide-production conflicts that ruined Ford’s quarter. Still, if Ford’s trucks maintain above-average profitability in the coming years and if Ford makes money selling EVs, the total company’s operating profit could easily top $15 billion. It does not depend on increasing the volume.

The $15 billion figure is far better than that if an investor considers all vehicles in Ford—be they electric, trucks, SUVs, or sedans—earn some sort of corporate average margin. That’s even better than Wall Street’s expectation of $11.5 billion in both 2022 and 2023.

Estimating operating profit based on profits from vehicle type is just one exercise, but it’s a good thing to know where profits actually arise.

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