Ford's stock traded higher after earnings and held firmly above the unchanged line, even with the broader market under pressure. It gave back some of its intraday gains but stayed positive, an unusual reception for earnings these days.
Why the results landed well
Several tailwinds are working in Ford's favor. The aluminum crisis appears to be over, which is a major boost for production and profitability. Drivers keep buying Ford's SUVs, which carry very high margins. It was a beat-and-raise quarter, a setup the street usually likes, though many beat-and-raise reports have drawn negative reactions lately. Ford's did not.
The automaker is cashing in on demand for gas-powered SUVs and pickup trucks. That softened the blow of a 10% drop in US vehicle sales in the second quarter. The profitable Bronco and Explorer SUVs, especially the higher-margin versions fitted with expensive off-road performance packages, sold very well.
The numbers
Automotive revenue came in at $44.89 billion versus the $44.72 billion expected, a slight miss on that single line. Adjusted EPS was 42 cents against the 36 cents the street wanted, giving Ford both a top and bottom line beat. EBIT reached $2.5 billion versus the $2.15 billion estimated, an adjusted EBIT margin of 5.2%, up 90 basis points from a year ago. Operating profit was $2.5 billion against the $2.1 billion the street expected; a year earlier operating profit was $2.1 billion.
The strong quarter let Ford raise its outlook for the back half. Full-year adjusted EBIT is now seen at $10 to $11 billion, up from $8.5 to $10.5 billion. Adjusted free cash flow is now $6 to $7 billion, up from $5 to $6 billion. These are significant upward revisions.
The weak spots
The GAAP net loss was $1.3 billion. A big gap between GAAP and adjusted earnings is not ideal, but Ford, like many automakers, has taken charges tied to EV investments. This gap came largely from the previously announced $3.6 billion EV-related charge. The EV business lost about $1.3 billion in the second quarter. Full-year EV losses are now expected at $4 billion, a bit lower than the $4.25 billion loss projected in April. The EVs did not perform well, but the guidance improvement made up for it.
New directions
Ford has an aluminum supply recovery plan that will help lift productivity. It is also leaning into energy, repurposing some of its stranded battery assets into Ford Energy, a grid-scale and utility energy storage business. That ties directly into the data-center buildout and rising need for power. This opens a potential new vertical. Tesla trades at a premium partly because of its other verticals beyond cars, so a second business could matter for Ford, though it all comes down to execution.
Citi upgraded Ford to buy from neutral with a new price target of $20; the stock traded at 15.68. Only four of the analysts covering Ford carry a buy rating, out of the 18 to 20 who cover it depending on the source, so the upgrade stands out. Citi points to F-series production ramps helped by lower aluminum costs, lower warranty accruals, better aluminum supply, and easing material costs, all positive for the second half.
Trading the move
There is nothing really bearish in the earnings, and the bullish momentum looks likely to keep pushing up, especially if the overall market lifts with it. The catch is trading right after earnings: with the market open only about two hours, implied volatility will come off, so you don't want to buy anything with a big Vega component (options that lose value as volatility drops).
A clean way in is a simple vertical spread: the 16/17 call spread for regular August expiration, August 21st. It traded between 25 and 35 cents this morning, around a 30 bid. Buying at 30 cents risks 30 cents. The most you can make is the dollar between the strikes minus the premium paid, so 70 cents net, a 2.33-to-one payout. The implied volatility lines up with that 17 strike, which also matches recent highs; the recent 52-week high was 17.78.
Market backdrop
These pullbacks look healthy. Anything that goes straight up or straight down is neither good nor fun to trade. Names that got parabolic and everyone wanted are now coming back within reach, and many chip stocks are getting close to levels people wished they had bought at. There are early signs of bottoming. That said, all bets are off after 1:00 this afternoon.
