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It’s been a tough year for the auto industry, with rising interest rates, economic uncertainty, and chip shortages weighing on inventories. While Ford Motor Company‘s (F 0.36%) cross-town rival, General Motors (GM 0.87%), largely impressed Wall Street with strong third-quarter results, Ford’s third quarter was a wider range of the good, the bad, and the ugly. Come and dig.
Good news, first
As investors review Ford’s third quarter results, one highlight you’re sure to notice is the improvement in cash flow. Ford’s third-quarter operating cash flow was $3.8 billion, and adjusted free cash flow checked in at $3.6 billion, driven by the company’s strong automotive cash generation.
The improved cash flow gave management the confidence to boost its full-year adjusted free cash flow target to between $9.5 billion and $10 billion, a sharp increase from the previous $5.5 billion to $6.5 billion. estimate.
It’s obviously good news for investors to see that kind of cash flow from a company in a capital-intensive industry, but the cash flow also helped boost Ford’s cash and liquidity to $32 billion and $49 billion — a good cushion with economic uncertainty and car needs. the horizon.
In addition to the cash cushion, cash flow helps support the company’s valuable $0.15 quarterly dividend, which is at a healthy 4.49% yield.
It’s also important for investors to understand that this isn’t a one-time spike, as Ford has a long trend of consistent free cash flow.
While improving cash flow was good news and allowed the company to weather economic uncertainty and invest in growth by building and redesigning its vehicle lineup, not everything in the third-quarter was Ford’s report is just as good.
The bad news
After a tumultuous year in the automotive industry, investors probably weren’t surprised to hear that chip shortages have caused headaches once again. Supply shortages left about 40,000 vehicles built but waiting for parts at the end of September.
Supply chain disruptions cost Ford about $1 billion in higher-than-expected supplier payments, which is not good news, no matter how divisive it is.
The silver lining is that Ford expects to complete those vehicles and sell them to dealers in the fourth quarter.
The really ugly news
Argo AI, a self-driving start-up largely backed by Ford and Volkswagen Group, it announced it would shut down operations after failing to attract new investors. That development caused Ford to record a massive $2.7 billion non-cash, pre-tax impairment on its investment in Argo and caused Ford to post an $827 million third-quarter net loss.
Not only was that a huge blow to Ford’s bottom line, but it also pushed management to change its approach to autonomous vehicle development.
Instead of developing large-scale level 4 advanced driver assistance systems (ADAS), which the company now believes is far from profitable and scalable, it will refocus on developing level 2 and level 3 systems — the systems that that, at a minimum , could provide a better consumer experience with Ford vehicles.
The bottom line
While the pain from Ford’s Argo write-off hurts for now, it may prove to be the smart long-term decision. Management now believes it can wait for others to develop this expensive technology that it believes is a long way from helping the company generate significant profits.
Overall, Ford was able to increase its top-line profit by 10% despite supply chain issues while improving cash flow and resetting its focus on luxury autonomous vehicle development. While it didn’t have as dazzling a third quarter as its cross-town rival, General Motors, it was still a solid quarter amid a year of uncertainty and proof that management is committed to deploying capital or cutting its losses in profitable ways. investors.
Daniel Miller has held positions at Ford and General Motors. The Motley Fool has positions and recommends Volkswagen AG. The Motley Fool has a disclosure policy.
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