TSLA - Ford: UAW Strike Could Cost A Fortune

2023-09-19 15:41:29 ET

Summary

• The ongoing UAW strike could cost Ford up to half a billion dollars in earnings per week of lost production.
• What’s worse is that if the strike ends on UAW’s current terms, then Ford's expenses would significantly increase over the following years as well.
• As such, there are questions about whether Ford will make significant progress and execute the turnaround given all the challenges that it currently faces.

The ongoing UAW strike could cost Ford ( F ) fortunes as the company could lose up to half a billion dollars in earnings per week of lost production. What’s more, is that there’s also a risk that Ford could lose a significant portion of its market share as other automakers not affected by the strike would be able to benefit from the current situation. While the company will employ several strategies to mitigate the risk caused by the strikes so that it can properly pivot to the development of electric vehicles, there are questions about whether Ford will make significant progress and execute the turnaround given all the challenges that it currently faces.

Can EVs Save Ford?

Ford’s latest earnings report was released back in July and covered the second quarter. During that period, the company’s revenues increased by 11.9% Y/Y to $42.43 billion and were above the consensus by $1.11 billion. Ford’s bottom-line performance in Q2 has also been impressive, as its net income stood at $1.9 billion while its adjusted EBIT of $3.8 billion was above the consensus of $3.2 billion.

On top of that, Ford’s F-150 model continues to grow at an aggressive rate and its overall business continued to perform relatively well before the UAW strikes kicked in. The sales data for August, which came out a couple of weeks ago, showed that the company’s deliveries increased by 2% to 161,300 vehicles last month, and increased by 8.5% to 1,342,507 vehicles in the first eight months of the year.

What’s more is that a fter reorganizing its business in March of 2022 and creating a separate division that works exclusively on developing electric vehicles, Ford was able to make significant progress in electrifying its fleet. The same data for August showed that the company sold 6,940 electric vehicles during the m onth, up 18% Y/Y, which accounted for 4.5% of the overall sales during that period. In addition to that, Ford had plans to double the output of its hybrid F-150 truck before the strike began, while its F-150 Lighting has one of the highest appeals among American consumers.

All of those developments made it possible for Ford to improve its outlook for the year and at the end of July it expected to generate $11 billion to $12 billion in adjusted EBIT in FY23. At the same time, the street made dozens of upward revisions and expects the company to increase its revenues by ~17% Y/Y this year to $174.46 billion.

Considering those estimates, I’ve created a DCF model that would help to figure out how big of an upside Ford’s stock represents. Most of the assumptions in the model below are either in-line with the street forecasts or in-line with the company’s performance in recent years. The WACC in the model stands at 9%, while the terminal growth rate is 3%.

This model shows that Ford’s enterprise value is $122.4 billion. When calculating the equity value, I've added cash to the enterprise value and subtracted the long-term debt. The long-term debt in this calculation includes the $19.169 billion debt of Ford Automotive and the $74.726 billion debt of Ford Credit. (See page 62 of the latest earnings report ). After calculating the equity value and dividing it by the outstanding shares, the model showed that Ford's fair value is $14.47 per share, which indicates that the company is undervalued at the current price and represents a solid upside.

The street shares a similar view and believes that Ford’s fair value is even greater than what my DCF model shows. However, before deciding whether it’s worth adding Ford’s shares to the portfolio, several risks and headwinds need to be considered in order to make a final decision.

Major Headwinds To Consider

The current UAW strike is obviously the biggest challenge that Ford currently faces. The model that I created is based on the outlook that was presented before the strike began and it doesn’t include any material impact that Ford is definitely going to experience in the following weeks. Deutsche Bank believes that a full strike could cost the company up to half a billion of dollars in lost earnings per week, while other analysts think that a strike by all UAW workers could result in an economic loss of over $5 billion in less than two weeks for Ford, General Motors ( GM ), and Stellantis ( STLA ), combined.

What’s more is that if the strike ends on UAW terms and results in a 36% pay hike, then Ford’s labor costs could increase by an additional $80 billion in the following years. If that’s the case, then it’s more than likely that the company would be required to cut its guidance, which would decrease the company’s fair value.

On top of that, the UAW strike comes at a bad time for Ford, which is in the middle of electrifying its fleet. While the progress has been significant in the last year, there are reasons to believe that the EV pivot could take longer than expected, while the losses would continue to mount. In Q2, the Ford Model E segment had a negative margin of -58.9% and the company expects to lose $4.5 billion in electric vehicles this year alone. Add to all of this the potential losses from the strike and it becomes hard to imagine how Ford would be able to successfully compete against Tesla ( TSLA ) which has no union, or against Chinese manufacturers that are increasing their share on the global EV market. Ford’s market share in the United States is already below the pre-pandemic levels and as the strikes continue while consumers switch to EVs of its competitors, it becomes harder for the company to increase its share with each passing day of strikes.

What’s more is that in addition to all of those challenges, Ford also has to service an incredible debt load. Even when we exclude the long-term debt of Ford Credit, the long-term debt of Ford Automotive was $19.169 billion at the end of June, up from $17.833 billion a year ago . As such, there’s also a risk that a prolonged strike or a major increase in labor costs could result in the elimination of dividends so that the company continues to generate positive FCF and honor its obligations at the same time.

The Bottom Line

Ford is in a tough spot right now. The ongoing strike could cost it fortunes in lost earnings as other competitors such as Tesla are gaining market share and don’t have to deal with unions when conducting their operations. While without the strikes Ford would’ve been considered a solid stock to own at the current price, its upside substantially decreases with each passing day we have UAW strikes as the company is at risk of missing its earnings target which could negatively affect its valuation. What’s worse is that if the strike ends on UAW’s current terms, the company’s expenses would significantly increase over the following years as well. As such, I decided not to open a long position in the company as its stock could be stuck in limbo or even depreciate further due to the challenges that Ford faces.

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