2024-01-04 14:30:00 ET
Summary
- Ford's position in the electric vehicle market is not as strong as its legacy in the automotive industry.
- The company's profitability is in the secular decline and my analysis suggests that future prospects look cloudy.
- The attractive valuation should not mislead potential investors as the discount is fair given all the secular challenges Ford is facing.
Investment thesis
The fact that Ford's ( F ) iconic F-Series pickup has been the best-selling car in the U.S. for over 40 years truly fascinates me. However, past domination is not a guarantee of future success, especially considering the massive secular shift to cleaner energy. My analysis suggests that Ford's position in the electric vehicles ((EV)) domain is not as strong as it used to be in the legacy automotive industry. The competition in the EV light trucks industry is intensifying rapidly, and it seems to me that Ford's F-150 electric version has no competitive advantages apart from the vibrant history of its legacy ancestors. Furthermore, Ford's presence in other EV segments is not extensive. All in all, I believe that the stock's undervaluation is fair, given all the challenges the company is facing. Profitability is in a secular decline, and I do not see opportunities for Ford to exercise strong pricing power amid the current fierce competition. That said, I assign Ford's stock a "Sell" rating.
Company information
Ford Motor Company produces and sells automobiles under the Ford and Lincoln brands. Ford's F-series truck has been the best-selling car in the U.S. for multiple decades .
The company's fiscal year ends on December 31. According to the latest 10-K report , in FY 2022, Ford's Automotive segment generated 73% of the total revenue. Starting in 2023, the company realigned its reporting structure and now has the following reportable segments: Ford Blue, Ford Model E, Ford Pro (combined replaced the Automotive segment), Ford Next (previously Mobility), and Ford Credit.
Financials
As one of the leading global legacy automakers, Ford faces substantial challenges due to the secular shift to cleaner energy. The company's top line stagnated over the last decade with a below 1% CAGR. The profitability metrics' long-term trend was also not quite positive. While the operating margin has been very volatile over the last decade, it has almost halved between FY 2013 and FY 2022. On the other hand, the good sign for investors is that the free cash flow ((FCF)) margin has been consistently positive for the majority of the last decade.
Despite being razor-thin, a consistently positive FCF margin allows the company to sustain a healthy balance sheet with solid $50 billion liquidity as of the latest reporting date. Ford's substantial total debt position should not mislead readers because it includes Ford Credit's facilities. According to the latest 10-Q report , excluding Ford Credit, the company had $19.8 billion in debt as of September 30, 2023. This indicates a $9.2 billion net cash position, which positions Ford well to weather macro headwinds.
The latest quarterly earnings were released on October 26, 2023. Ford missed Q3 earnings consensus estimates by a notable margin. Since it has been more than two months since Ford's latest earnings went live, I will not dig into deep details here. I will just underline that revenue grew by an impressive 10.7% on a YoY basis, and the adjusted EPS expanded from $0.30 to $0.39.
I would rather focus more attention on forward-looking analysis to better understand Ford's prospects. It is apparent that for giant legacy automakers, the massive secular shift to electric vehicles (EVs) is a big challenge. Realigning the business of a hyper-scale legacy automaker like Ford towards new trends is costly and requires exceptional execution.
Ford has a vibrant history, which has allowed its iconic F-150 truck to be the most popular car in the U.S. for over four decades. However, it is important to understand that F-150 dominance started and continued during the internal combustion engine ((ICE)) vehicles era. I agree that the transition to EVs is not a new trend, but we are in the early stages of the electric light trucks industry. The electric version of Ford's legendary F-150, the Lightning , seems to be in a pole position thanks to strong brand loyalty gained by its ICE ancestor. However, it is also crucial to underline that the competition in the EV light trucks field is intensifying rapidly, something the original F-series likely never faced. The first ever F-series pickup was introduced to the market in 1948 , and its primary competitors, Chevrolet C/K and Dodge D were introduced to the market only in 1960, i.e., the F-series had a 12-year handicap. The F-150 Lightning does not have such a favorable competitive landscape since it already looks like a " red ocean ". Apart from the competition from pure-EV innovative players like Rivian ( RIVN ) and Tesla ( TSLA ), Ford also continues to compete with its historical rival General Motors ( GM ). While GM's electric Hummer and Silverado also represent legacy automakers, I would like to compare how the F-150 Lightning looks against its innovative competitors, Tesla's Cybertruck and Rivian's R1T. As you can see in the table below, which I have compiled from the information presented on these companies' official websites, Ford does not have any competitive advantages against its rivals on a high level. The Cybertruck and R1T offer a longer range and faster motors at around the same price as the high-end Lightning, which means Ford does not have a strong market positioning here.
Ford's bulls might argue that there is a high level of uncertainty around Tesla's ability to ramp up Cybertruck production, given multiple launch delays . But let me remind you that Tesla's history teaches us that they strive to achieve product perfection, which prevails over delivery launch deadlines, and this strategy has generally paid off. For example, there were several delays in the Model Y launch, but now this car is rapidly climbing up in the best-selling cars charts globally and is already the best-selling car in Europe . On the contrary, the F-150 Lightning had multiple recalls over its short life, which might indicate that its 2021 launch was too early and likely damaged the truck's reputation.
Apart from the F-150 Lightning, I cannot say that Ford's presence in the all-electric field is extensive. The company offers an SUV called Mustang Mach-E and an E-Transit van. Mustang Mach-E is in a promising SUV niche, but it competes with Tesla's Model Y and is well behind the competitor. The company sold less than 15 thousand Mach-Es in Q3 while Tesla sold more than 300 thousand Model Ys over the same period. The E-Transit van might look promising, being the number one electric van in Q3 , but this niche is at the very early stages of development, and a vast level of uncertainty is in place. Moreover, in this niche, Ford will compete with Rivian's vans, which are backed by its hyperscale strategic partner, Amazon ( AMZN ).
Valuation
F has rallied by around 11% over the last 12 months, substantially lagging behind the broader U.S. stock market. The stock has an attractive "A-" valuation grade from Seeking Alpha Quant because its ratios are substantially lower than the sector median and the company's historical averages. That said, the stock looks attractively valued from the perspective of valuation ratios.
Since I believe that Ford's long-term prospects in the EV race look cloudy, I cannot simulate the discounted cash flow ((DCF)) model here. Therefore, I would be better off proceeding with the dividend discount model ((DDM)) instead. I use an 8% required rate of return, which is within the WACC range recommended for F by valueinvesting.io. I use a $0.60 dividend as a base, the consensus estimate for FY 2024. This estimated payout is in line with the pre-pandemic levels. Therefore, I consider the forecast to be fair enough. For the dividend growth, I use an optimistic 3.8% , which is a forecasted forward diluted EPS growth.
According to my DDM simulation, the stock's fair price is $14.3. This represents a 17% upside potential from the current price levels. However, given all the secular challenges the company faces, I consider this discount to be fair.
Risks to my bearish thesis
Despite facing strong secular challenges, Ford is still one of the most well-known brands globally, with a large fan base. It relates not only to the company's cars but to the stock as well. During the 2021 stock market frenzy, Ford's stock price almost doubled. December 2023 was also full of massive optimism around the stock market, as interest rates are expected to go down in 2024. A new stock market mania might also lead to a new solid bull run for F in 2024, which adds significant risks to my bearish thesis.
The demand for the stock might also be fueled by value investors as Ford currently offers an attractive 4.9% forward dividend yield, which I consider to be safe given the company's solid financial position. After such a massive rally in growth stocks in 2023, the rotation from growth to high-yielding value is probable. This also might be a solid positive short-term catalyst for the F stock price.
Bottom line
To conclude, F is a "Sell". The substantial undervaluation should not mislead potential investors because it looks fair given the secular decline in profitability. Intensifying competition means almost no room for Ford to exercise pricing power, especially when Tesla's profitability allows the company to disrupt the industry with massive discounts , as we have seen in 2023.
For further details see:
Ford: Bumpy Road Ahead