Autos

Ford shares tumble nearly 7% as $11 billion restructuring hits bumps

Key Points
  • Ford's third-quarter results and lower guidance are most recent example of speed bumps for CEO Jim Hackett's $11 billion restructuring plan.
  • Hackett and other executives pointed to product mix, increasing free cash flow and progress in Europe as examples of the turnaround plan taking hold.
  • Shares of Ford closed down nearly 7% on Thursday.
Jim Hackett, president and chief executive officer, Ford Motor stands outside the headquarters as they celebrate the production of the 10,000,000 Mustang on August 8, 2018 in Dearborn, Michigan. 
Jeff Kowalsky | AFP | Getty Images

DEARBORN, Mich. — Ford Motor is paving the way for a more profitable future under an $11 billion restructuring plan spearheaded by CEO Jim Hackett, however it's hitting some speed bumps along the way.

Its third-quarter earnings were the most recent example of that. Ford on Wednesday delivered a big earnings beat for the third quarter but lowered investor expectations for the rest of the year as the automaker grapples with increased competition and falling consumer demand, specifically in China.

Ford shares fell by about 2.5% in after-market trading Wednesday following the news. The stock closed down nearly 7% on Thursday, a sign investor patience is wearing thin as Hackett's turnaround plan slowly takes shape.

"The third-quarter results do have evidence of the global redesign of Ford," Hackett said Wednesday on a call with investors. "Make no mistake, humility of the work that we still have to do, I'm still very confident of the team here and the progress that Ford Motor Co. is making. We're focused on improving our fitness and our outcomes."

Hackett and other executives pointed to product mix, increasing free cash flow and progress in Europe as examples of the turnaround plan taking hold.

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Restructuring announcements in the third quarter included the sale of its vehicle subscription service, Canvas. It also struck a $275 million joint venture with Mahindra & Mahindra, one of the largest auto manufacturers in India, that included the Mumbai-based company taking a 51% stake in Ford's operations in the country.

Hackett announced the $11 billion restructuring in July 2018. It started having a noticeable impact on the business later in the year and into 2019 in the form of thousands of layoffs and global business deals, including the Mahindra joint venture as well as an expanded partnership with Volkswagen on autonomous and all-electric vehicles.

'Bumpy ride'

Ford expects the restructuring to cost $3 billion to $3.5 billion in earnings before interest and taxes for the year, including $1 billion in the third quarter. Through the third quarter, the restructuring charges totaled $3.3 billion, or 30%, of the planned $11 billion through 2022.

David Leggett, automotive editor at data and analytics firm GlobalData, said Hackett "appears to be making the right strategic moves, but they will take time to bear fruit."

Bank of America Merrill Lynch analyst John Murphy agrees. In a note to investors reaffirming a buy rating for Ford on Thursday, he said despite "broad concern" about deteriorating macros, the turnaround "should drive more positive sentiment over time." Murphy said it "could be a bumpy ride, but a lot of bad" is already priced into the stock.

RBC Capital Markets on Thursday reduced its price target on Ford to $9 from $9.50, citing the adjusted guidance. RBC's Joseph Spark, in a note to investors, said Ford's major issues of higher warranty costs, increased incentives on U.S. vehicles and problems in China "could, at least in part, linger into 2020."

Ford CEO Jim Hackett and VW CEO Herbert Diess speak together in Detroit.
Boris Roessler | picture alliance | Getty Images

Increased headwinds

Ford on Wednesday said it expects to make less profit than previously expected for the year, lowering its 2019 earnings guidance by $500 million to between $6.5 billion and $7 billion. Ford also shaved 3 cents off of the top range of its earnings per share forecast, to between $1.20 and $1.32 per share.

The change in guidance was attributed to higher-than-expected warranty costs and incentive spending as well as weakening sales in China, according to the company. Ford retained its free cash flow forecast of $2.8 billion or more for the year, which Ford CFO Tim Stone called "the most important financial measure" for the automaker.

"From a key takeaway standpoint, we think Q3 was a good quarter," Stone told reporters during a briefing about the quarter. "The progress we've made also indicates we have more work to do, more opportunity ahead but it's a good start for the year."

Botched launch

Ahead of Ford's earnings, the launch of the company's redesigned Ford Explorer, which Hackett has touted as a symbol of the company's future, was singled out as being problematic.

Ford is reportedly having difficulties with the launch, leading to some vehicles having to be sent to a factory in Michigan to be repaired before going to dealers, Bloomberg wrote Monday.

A Ford Motor Co. Explorer Hybrid sports utility vehicle (SUV) is displayed during the 2019 North American International Auto Show (NAIAS) in Detroit, Michigan, U.S., on Monday, Jan. 14, 2019.
Daniel Acker | Bloomberg | Getty Images

Hackett and other executives on Wednesday confirmed the botched launch, which included a complete overhaul of the company's 95-year-old plant near Chicago where the vehicle is built.

"Simply put, we took on too much," Joe Hinrichs, Ford's president of automotive, told investors. "We signed up for too much at launch."

The launch, according to Hinrichs, included an array of different models and powertrain components as well as starting production on three shifts, something that typically isn't done for a redesigned vehicle to allow for slower production and additional quality checkpoints.

"Part of the lessons learned is obviously go back to how we manage these launches and sequence them in a way that gives the team a chance to be successful," Hinrichs said.

Ford, according to executives, is approaching full production on the Explorer as well as the Lincoln Aviator, a vehicle built at the same plant with similar components, at the plant.

"I feel good about where we are for the rest of the year," Hinrichs said.