HNDAF - Ford's Growing Dominance In The EV Market Expands Globally

2023-07-27 06:00:52 ET

Summary

• Ford, one of the largest automotive giants, is slated to publish its Q2 financial report on July 27.
• On July 6, 2023, the Detroit auto giant delighted investors by reporting an 11.7% increase in U.S. car sales in the second quarter from the first three months of 2023.
• Ford's dividend yield of 4.42% and demand for its electric vehicles are among the many factors that will reduce the impact of short sellers on its share price.
• We initiate our coverage of Ford Motor with an "outperform" rating for the next 12 months.

On July 27, 2023 , Ford Motor ( F ), one of the largest automotive giants, will publish its financial report for the second quarter of 2023. One hundred seventy-three thousand employees worldwide are actively working to develop, manufacture and sell cars, trucks, and SUVs that meet the needs and desires of consumers worldwide.

On July 6, 2023 , the Detroit auto giant delighted investors by reporting an 11.7% increase in U.S. car sales in the second quarter from the first three months of 2023. What's more, Mustang Mach-E sales continue to accelerate and are up about 110% in June this year compared to 2022. In comparison, the company's truck sales were 295,602, up 26.2% year-on-year and 16.4% quarter-on-quarter, thanks to the launch of the new Super Duty. Just as important, Jim Farley's inventive business approaches and the recovery of the U.S. economy have affected the volume of trucks sold by Ford, which exceeded pre-COVID-19 levels, and we estimate this trend will continue in the future.

On the other hand, in mid-July , it was announced that the Rouge Electric Vehicle Center in Michigan was temporarily closed for a final plant upgrade. In the short term, this could hurt the company's margins, but after its launch, annual production of the F-150 Lightning will triple, according to Ford's plans, to 150,000 trucks. Increasing the plant's capacity will allow the company's management to reduce its price and continue to increase its share in the automotive market. This is especially important as inflation continues to decline, which could prompt the Fed to cut interest rates later this year. As a result, car loan requirements will become more affordable, triggering a new commercial transportation boom.

The revenues of the company's two main business segments, Ford Blue and Ford Pro, continue to grow year after year, despite the negative impact of the Ukraine-Russia conflict and the persistence of high-interest rates, which limit the ability of some people to buy a car. As a result, since the beginning of 2023, Ford's share price has shown growth of more than 22%, but at the same time, their competitors in the industry, such as Ferrari ( RACE ), Honda Motor ( HMC ), and Li Auto ( LI ), have shown higher growth dynamics.

We initiate our coverage of Ford Motor with an "outperform" rating for the next 12 months.

The financial position of Ford Motor and its prospects

Ford's revenue for the first three months of 2023 was $41.47 billion, down 5.8% from the previous quarter and up 20.3% from the first quarter of 2022. Under the leadership of Jim Farley, the company continues to make massive progress in expanding Ford's product range and rapidly gaining a share in the growing electric vehicle market.

The Ford Blue segment focused on selling hybrid vehicles and Ford and Lincoln cars with internal combustion engines, spare parts, accessories, and various services for retail customers, bringing about 67.7% of the company's total revenue in the 1st quarter of 2023.

According to Seeking Alpha , Ford's Q2 2023 revenue is expected to be $37.48-$43.6 billion, up 9.1% from analysts' expectations for the first three months of 2023. At the same time, under our model, the company's total revenue will be slightly higher than the median value of this range and will amount to $41.1 billion.

The increase in revenue in the second quarter of 2023 compared to the previous year will be provided, among other things, by the continuing trend in vehicle sales growth in the United States. So, during this period, 295,602 trucks were sold, which is 61,416 more than in the second quarter of 2022. With the exception of cars, SUVs and trucks showed quarterly sales growth, which is especially important in the current period when the Fed is pursuing a tight monetary policy. Even though one of the goals of this policy is to reduce the volume of loans and investment in the economy, many companies continue to rejuvenate and expand their fleet of Ford vehicles necessary to increase their productivity and further business growth.

Based on current macroeconomic data, we expect the Fed to cut interest rates by the end of 2023/beginning of 2024. This expected decline will increase the number of approved car loan applications by banks in the long term. Additionally, the $1 trillion Infrastructure Investment and Jobs Act signed by Biden in 2021 continues to impact the industry positively. However, many of the bill's clauses will come into effect in 2023 and increase investment in energy infrastructure development, a national EV charging network, and road and bridge development. Ultimately, we believe this will lead to higher Ford truck sales between 2023 and 2026.

Ford's operating income margin in Q1 2023 was 4.49%, continuing the growth that began in the third quarter of 2022 and approaching its median of 5.95% for the period between January 1, 2021, and the end of March 2023. At the same time, we forecast that by 2023 the company's operating income margin will remain stable and reach 6.2%, and by 2024 this value will increase to 9.4%. This will be due to the reduction in the cost of raw materials for the production of cars, the increase in production capacity and efficiency of production processes, and job cuts, plans for which were announced at the end of June .

The company's earnings per share for the first three months of 2023 was $0.63, up 23.5% quarter-on-quarter, and just as importantly, it beat analyst consensus estimates in six of the last nine quarters.

According to Seeking Alpha , Ford's Q2 EPS is expected to be $0.36-$0.6, up 12.2% from the consensus estimate for Q1 2023. While we believe this is slightly underestimated, our model puts Ford Motor's EPS at $0.58.

At the same time, Ford's Non-GAAP P/E [TTM] is 6.41x, which is 52.6% less than the average for the sector and 14.38% less than the average over the past five years. On the other hand, P/E Non-GAAP [FWD] is 7.19x, which is one of the factors indicating that the company is significantly undervalued in the current period of global inflation decline.

At the end of December 2022 , the company's unsecured debt was well diversified, allowing Jim Farley to continue increasing the production capacity needed to build large volumes of Ford's electric vehicles, for which demand has snowballed in recent months.

At the end of the first quarter of 2023, Ford's total debt was about $139.29 billion, down slightly from 2021. However, despite the EBITDA growth in the last three quarters, the total debt/EBITDA ratio increased from 8.63x achieved in 2021 to 9.76x.

While the total debt/EBITDA ratio is above 9.5x, indicating the persistence of increased financial risks, Ford's management has done a fantastic job in recent years of paying off debt and diversifying it. In addition, considering the maturity dates of bonds and debentures, the increased operating income in recent quarters, and the growth in car sales, we do not expect Ford to have severe problems with its redemption.

Conclusion

This Thursday, July 27, after the bell, Ford Motor is one of the largest automotive giants to publish its financial report for the second quarter of 2023.

In early July 2023, the Detroit auto giant delighted investors by reporting an 11.7% increase in U.S. car sales in the second quarter compared to the first three months of 2023. Despite the Russia-Ukraine war's negative impact on the automotive industry, Jim Farley's innovative business strategies have positively impacted the volume of Ford trucks sold in the United States, which exceeded sales in 2019. We estimate that this trend will continue as production capacity in Europe increases.

Ford's dividend yield of 4.42%, rising operating income, and demand for its electric vehicles are among the many factors that will reduce the impact of short sellers on its share price.

We initiate our coverage of Ford Motor with an "outperform" rating for the next 12 months.

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