Why Ford's warning and stock drop do not derail our long-term belief in the company

Published Tue, Sep 20 20223:11 PM EDTUpdated Tue, Sep 20 20223:19 PM EDT

Ford Motor (F) late Monday became the latest company to preannounce third-quarter results, signaling it would close out the quarter ending Sept. 30 with 40,000 to 45,000 unfinished vehicles in inventory, due to supply shortages and inflation. Shares of the Club holding company were down 12% on Tuesday, but the question now is: Do you buy the dip or are these missed sales gone for good? In terms of the financial hit, management noted that these unfinished vehicles "disproportionately include high-demand, high-margin models of popular trucks and SUVs," adding that the company expects inflation-related supply costs for the quarter to come in roughly $1 billion above expectations. In other words, an unfavorable product mix in the third-quarter is being compounded by higher-than-anticipated input costs, resulting in a one-two hit to profitability. Management anticipates third-quarter adjusted earnings before interest and taxes (EBIT) to be between $1.4 billion and $1.7 billion, well below the $2.99 billion estimate predicted by analysts. Ford is set to release its full third-quarter results on Oct. 26. Now, if you're a trader, you're selling on this news without a second thought, simply because there's no reason to believe that shares have much upside in the near term. If, however, you are a mid- to long-term investor, the most pressing concern is whether these sales will be recouped in subsequent quarters. Fortunately, management believes that the unfinished vehicles "will be completed and sold to dealers during the fourth quarter." Moreover, despite that unexpected $1 billion increase in input costs, Ford reiterated their $11.5 billion to $12.5 billion full-year operating profit forecast. Notably, the missed sales appear to be resulting in a so-called push out rather than permanently lost demand. That's crucial for the long term because it means that profits will just be recorded a bit later than anticipated – but they will be generated. We tend to see this dynamic with both high-ticket items and companies that have a loyal customer basis. Simply put, if you are a consumer ready to plop down a good chunk of money, be it $1,000 on a new iPhone or tens of thousands on a new vehicle, chances are you have done your homework, and you aren't going to allow a few months delay let you settle for the next best thing. As we noted during Tuesday's "Morning Meeting," our checks indicate that the component shortage is not semiconductor-related but rather a dearth of low tech parts. This speaks to the confidence management has in being able to realize the missed sales in the fourth quarter. The reiteration of full-year operating profit guidance, despite the $1 billion headwind, may indicate a few underlying positives. We see three possibilities. First, it could simply indicate that Ford is itself raising prices on new vehicles. If so, this could suggest enhanced profit margins down the line, as the vehicle price may very well prove stickier than the supplier prices. Second, it may speak to reduced marketing and other expenses. After all, there is no need to market for vehicles you can't sell yet. While the cost reduction would not be a structural one (i.e., more temporary in nature), it does highlight management's ability to effectively navigate the difficult and fast-changing operating environment. Third -- arguably, the most bullish view -- it could point to overall profitability at Ford improving faster than anticipated. The only way to absorb higher input costs while maintaining profit guidance on a dollar basis is to realize lower costs elsewhere – meaning that the margin on a percentage basis would have to be improving. Recall, management is targeting a consolidated adjusted operating margin of 10% -- 8% on electric vehicles -- by 2026, up from 7.3% in 2021. Ultimately, we don't believe this preannouncement to be anything more than a near-term issue. Given management's confidence that the sales will be made up by year end – not to mention the potential longer-term positives indicated by the company's ability to absorb a $1 billion input cost without revising 2022 guidance -- we believe would-be buyers should come in around the $13 level. (Jim Cramer's Charitable Trust is long F. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Ford Motor Co. signage at the Washington Auto Show in Washington, D.C., Jan. 21, 2022.

Al Drago | Bloomberg | Getty Images

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