Ford's warning shows lingering supply woes

Ford Motor Co.'s warning last week that its third-quarter earnings will be marred by higher-than-expected supplier costs and a lack of parts is the latest sign of the lingering supply chain woes plaguing the industry.

The automaker said that inflation-related supplier costs during the third quarter will run about $1 billion higher than it had expected. Separately, it expected to finish the period with 40,000 to 45,000 unfinished vehicles waiting on parts, most of which will be high-margin pickups and utility vehicles.

As a result, Ford cautioned that adjusted earnings before interest and taxes will be about half of the $3 billion that analysts had estimated. Ford's stock suffered its largest one-day decline in more than a decade on the news.

"Ultimately, this news is somewhat surprising as broader macro news suggest supply chains have gotten incrementally better over the last few months," John Murphy, research analyst at Bank of America Merrill Lynch, said in an investor note.

Adam Jonas, an analyst with Morgan Stanley, said that despite some reports of "marginal improvement" in the automotive supply chain, Ford's forecast is a sign "that we are not yet out of the woods."

Ford signaled that it expected to make up for the third-quarter issues in the final stretch of the year. It reaffirmed its full-year guidance of $11.5 billion to $12.5 billion in adjusted EBIT, which would be 15 to 25 percent more than it earned in 2021.

Part of the automaker's rationale is that it will generate delayed revenue from the unfinished vehicles as they are completed and shipped to dealers in the final three months of the year.

"Overall, Ford's guidance implies a robust 4Q," Murphy wrote.

Ford has been warning of increasing costs for some time.

In July, CFO John Lawler said the company expected $3 billion in "inflationary pressures" this year, triple the $1 billion increase it projected in the first quarter. Ford also said then that it expected commodity prices to increase to $4 billion, potentially offsetting favorable pricing.

A spokesman said the $1 billion figure noted last week was in addition to the expected costs it detailed in July.

Ford's not alone. Reuters last week cited several suppliers that said they have raised prices on parts by 7 to 20 percent across the board.

"It was only a matter of time before supplier cost recoveries began to flow," Jonas said.

Thomas Goldsby, chair in logistics at the University of Tennessee Knoxville's supply chain management department, said companies in a variety of sectors are looking to boost margins to combat inflation.

"There's a lot of price-taking happening," Goldsby said. "Everyone is seeing inflation on every line item, from materials and labor to energy and transportation.

"I wouldn't be surprised if that's happening up and down the automotive supply chain because it's happening everywhere."

Murphy, the Bank of America analyst, maintained his "buy" rating on Ford after its warning, he said, because he has a positive view of its overarching strategy.

"Despite the tough macroeconomic backdrop and this latest news suggesting continued challenges from the supply chain and broader inflation, we believe Ford is just starting to hit a more sustainable inflection in earnings," Murphy said.