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For over five years, warranty costs have been an increasingly serious issue for Ford, and the past year has been particularly challenging, adding insult to injury.

Ford Motor Company (F) reported second-quarter earnings that fell short of Wall Street's expectations, as its business performance could not overcome higher warranty costs. On Wednesday, July 24th, Ford's second-quarter report revealed an operating profit of $2.8 billion, a 26% decrease year-over-year and below the $3.7 billion expected by analysts covered by FactSet.

The capital market responded swiftly. By the close of trading on Thursday, Ford's stock price had plummeted by 18.36% to $11.16—this marked the largest single-day drop since November 18, 2008, when the stock price fell by 25%. On that day, the S&P 500 index fell by 0.5%, while the Dow Jones Industrial Average rose by 0.2%.

Ford's traditional automotive business, Ford Blue, reported an operating profit of $1.2 billion, about $300 million higher than the first quarter, with expectations for greater improvement in the future. However, the high warranty costs continue to drag down performance.

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In the second quarter, Ford's warranty expenses increased by $800 million sequentially, totaling $2 billion, which is 4% of sales. For an automaker, this figure is quite high. Ford stated that the cost expenditures are mainly related to models from 2021 and earlier.

Freedom Capital Markets analyst Mike Ward wrote in a report on Thursday: "For over five years, warranty costs have been an increasingly serious issue for Ford, and the past year has been particularly challenging, adding insult to injury. From 2011 to 2019, warranty costs accounted for an average of 1.6% of the company's revenue; however, since the beginning of 2022, the average proportion of warranty costs has reached 2.9%, and in the second quarter, it exceeded 4%."

Ward rated Ford's stock as "Buy" and set a target price of $17.

On a more positive note, Ford's electric vehicle business, Model e, saw a reduction in losses compared to the previous quarter. The report shows that the business lost $1.1 billion this quarter, down from $1.3 billion in the first quarter.

Ford's commercial business, Ford Pro, made a profit of $2.6 billion, lower than the $3 billion in the first quarter. However, Ford Pro's operating margin of 15.1% is essentially flat compared to the same period last year and is the highest among the three business segments.Regardless of how investors perceive it, the fact is that Ford's overall operating profit did not meet expectations.

For investors, the hope that Ford brings is its performance guidance—projecting an annual operating profit of about $11 billion, the same as the figure given in April. In 2023, Ford's operating profit was $10.4 billion.

Looking at Ford's performance guidance, the company's operating profit for the second half of the year is about $5.5 billion, higher than the $4.6 billion expected by Wall Street.

Despite the possibility of a better performance in the second half of the year, investors still hope for "better-than-expected and growing" results this quarter. General Motors (GM) reported better-than-expected second-quarter results and raised its full-year operating profit target from $12.5 billion to $14.5 billion to $13 billion to $15 billion. However, GM's stock fell by 6.42% on Tuesday.

So far, the stocks of American automakers have had a tough week. On Wednesday, Tesla's stock fell by 12.3% due to lower-than-expected second-quarter earnings. Price cuts on models and ongoing competition continue to impact its performance.

The options market had previously estimated that Ford's stock price would rise or fall by about 6% after the earnings report. After the release of the past four earnings reports, the stock has averaged a 6% increase—rising twice and falling twice during the period.

The final outcome, however, was that Ford's stock performance was much worse than traders had anticipated.