Summary
- Ford's weak FQ4 earnings release stunned investors as it underperformed General Motors' recent earnings beat.
- As the EV "Game of Thrones" heats up, investors must weigh whether CEO Jim Farley and his team can steer Ford to a turnaround in 2023.
- Investors eyeing an opportunity to increase positions should exercise patience, waiting for a more favorable entry point to boost their reward-to-risk.
Ford Motor Company ( F ) sent its investors who joined the buying frenzy in late January sprawling for cover after posting a shocking miss against its already revised adjusted EBIT guidance.
Accordingly, CEO Jim Farley & team posted an FY22 adjusted EBIT of $10.4B , well below its revised $11.5B outlook, given Q4's adjusted EBIT of $2.6B. Farley acknowledged that the company " left about $2 billion of profit on the table due to cost and especially continued supply chain issues."
Management expressed frustration about its significant underperformance, which came a few days after arch-rival General Motors ( GM ) posted a stellar performance.
Investors will question whether Ford's No.2 position in the US EV rankings can be sustained in moving forward. Will General Motors demonstrate better execution through the potential of its Ultium platform?
Management highlighted that its industrial platform still has "deeply entrenched issues" but is confident of improving its cost base in 2023, as Farley accentuated: "[it] presents a huge opportunity."
As such, Ford investors need to assess the company's FY23 adjusted EBIT guidance of $9B to $11B in the correct context. Based on a $10B midpoint estimate, it's expected to be slightly down from FY22's $10.4B result.
However, management also highlighted that it baked in a further normalization in Ford Credit's adjusted EBT to $1.4B (FY22: $2.7B) and $2B in "lower past service pension income."
As such, Ford expects its industrial system to improve significantly in 2023 as it continues to scale volume, bolstered by an improved supply chain.
Reasonable? Too early to tell for now. Management acknowledged its execution mishaps against an automotive chip supply chain that has proved persistently challenging. However, an assessment of supply chain sources suggests that the supply/demand dynamics could still prove to be headwinds in 2023.
As such, it could hamper Ford's ability to scale production efficiently in 2023, worsened by a potentially higher promotional environment in the US as automakers compete for market share.
General Motors and Volkswagen ( VWAGY ) mentioned that they would not engage in aggressive pricing action and participate in the " Game of Thrones. " However, one of the critical underpinnings of auto OEMs' EV transformation will be their ability to scale rapidly.
As seen in the brand positioning of Tesla ( TSLA ) in China, the aggressive price cuts have triggered a flush of orders , which could even lead it to increase Giga Shanghai's production cadence.
Hence, we think it's still too early for legacy automakers to decide whether to engage in aggressive pricing actions, as macroeconomic factors are largely out of their control. Moreover, given the recent hot jobs data , if the Fed chooses to remain hawkish for longer, we believe Farley's more prudent outlook helps reset investors' expectations ahead of time.
Therefore, it might even help to reduce negative surprises subsequently, which could affect management's credibility.
As such, the critical question facing F investors now is whether they think management has instilled sufficient pessimism in its outlook. Investors also need to consider whether the $3B in cost savings could be achieved in its industrial system, that's fundamental to Ford meeting its FY23 profitability guidance.
F price chart (weekly) (TradingView)
F bulls who ignored the pessimism confidently and bought its lows in July, October, and December should have outperformed the S&P 500 ( SPX ) ( SPY ).
As such, investors who bought based on our late December article still outperformed the market despite the recent post-earnings pullback.
Therefore, we believe long-term investors remain confident in pulling the buy trigger (at the right levels), as sellers are still in control.
With the recent sharp reversal from its attempt to retake its 50-week moving average (blue line), we think caution is warranted.
Investors are encouraged to wait patiently for constructive consolidation first in its price action to improve reward/risk before deciding to add more positions.
Rating: Hold (Revise from Buy).
For further details see:
Ford: Brace For More Pain