2023-12-01 06:30:00 ET
Summary
- Ford Motor Company's stock has fallen significantly due to operational risks and concerns about its growth prospects. It looks like the majority of speculators are bearish on Ford.
- Due to the enormous negativity that has surrounded the company over the past few months, the stock has become oversold and undervalued, in my view.
- There's a sign that the UAW strike likely had a less meaningful impact on production through October than previously expected.
- Recently approved buybacks should give the stock the needed boost.
- Based on the above, I rate F stock as a 'Buy' today.
Introduction
The only time I've written about Ford Motor Company ( F ) was in October 2021 , when I tried to model out the company's future based on the EV transition that the company was actively preparing for at that moment. My fairly detailed DCF model at the time showed an upside potential of 46%, which to my surprise was realized very quickly. But then came 2022, and the shrinkage of valuation multiples against a backdrop of rising interest rates made its own adjustments, causing Ford's stock to fall significantly.
Then the problems with the unions began, which brought a lot of operational risks to the surface - the share price fell to its local lows as a result.
Seeking Alpha, my article on F, price performance
In the social networks and in the comments on articles by other authors , I see that more and more people are bearish about Ford and its growth prospects. So I decided to check whether this is actually true.
Ford's Recent Developments
On October 26, 2023 , Ford Motor reported a 3Q FY2023 adjusted net income of $1.575 billion ($0.39 per share), up from $1.236 billion ($0.30 per share) in 3Q FY2022. Revenue rose to $43.801 billion, up 11% from the prior year. The YoY growth happened thanks to increased sales, higher net pricing, lower commodity costs, and supply-chain improvements. Despite that, the actual results missed the consensus expectations, leading to a massive sell-off in the stock's price.
In 2023, Ford underwent a restructuring, adding to its operations 3 new segments: Ford Blue (gasoline and hybrid vehicles), Ford Model E (electric vehicles), and Ford Pro (commercial products and services). In Q3 FY2023 , Ford Blue reported a revenue of $25.6 billion, up 8%, with increased EBIT and margin. Ford Model E showed a revenue of $1.8 billion, up 29%, but incurred an EBIT loss of $1.3 billion (-$3.1 billion YTD). Ford Pro recorded a revenue of $13.8 billion, up 15%, with improved EBIT and margin.
Ford Motor Credit reported a 3Q FY23 EBIT of $0.4 billion, down from $0.6 billion, citing lower financing margins and credit losses.
A new labor agreement with the UAW, pending ratification, involves an $8.1 billion investment and substantial pay raises. CEO Jim Farley announced a $12 billion postponement of planned EV investments, attributing it to a challenging market, weaker demand, and increased competition from Chinese EV manufacturers. Ford also withdrew its full-year 2023 guidance , attributing the decision to the pending ratification of its tentative agreement with the UAW.
On November 20 , UAW members, both hourly and salaried, approved new contracts with GM, Ford, and Stellantis, with a 64% approval rate. While defined benefit pensions for post-2007 hires were not regained, employer contributions to 401(k)s were boosted to 10%, more than doubling many members' annual contributions, Seeking Alpha reports. The contracts include substantial pay raises, resulting in a 33% wage gain over the contract's lifetime.
Given these factors, there is an increased risk of uncertainty - first operationally and now also financially (following ratification). As a result, EPS estimates have been revised downwards 15 times in the last 90 days:
We have too little information to declare the imminent end of these very revisions: With the withdrawal of the guidance, it is now very difficult for analysts to make positive contrarian statements.
So Why Am I Getting Bullish On Ford Then?
According to the recent Automotive Industry Weekly Pit Stop by BofA [November 17, 2023 - proprietary source], in October Detroit Three ((D3)) inventories were largely flat MoM for Ford and General Motors ( GM ), and down a modest 3k units for Stellantis ( STLA ). This suggests the UAW strike likely had a less meaningful impact on production through October than previously expected.
BofA [November 17, 2023 - proprietary source]
The market expects the company to maintain a dividend yield of over 5% (and over 6% by FY2025) - this is historically a fairly high level, albeit not extreme.
At the same time, the company has a fairly healthy balance sheet with positive adjusted FCF in each of the last quarters:
On November 29, Ford's direct peer - GM - skyrocketed after announcing a $10 billion accelerated share repurchase program, revising its 2023 outlook, and introducing cost-cutting initiatives. A few days earlier, Ford approved a share buyback program of up to 51 million shares, aiming to counterbalance the dilutive impact of share-based compensation granted during 2023, as mentioned in the SEC filing . While this announcement has not caused a dramatic turnaround in the stock, I believe that Ford's shares should receive an additional boost from the future tightening of shares supply in the market and the "post-UAW normalization" of operating activities.
When we talk about Ford's valuation, it is not only the relatively high dividend yield but also the valuation multiples that speak in favor of buying the dip. BofA writes that F shares have an upside potential of 87% and should trade at an implied P/E of ~11x by the end of FY2024 (instead of the current implied 5.74x).
Argus analysts partially supported that view in their recent note [November 6, 2023 - proprietary source]. Despite prospects for rising costs following the UAW settlement, they believe that Ford shares remain favorably valued based on the company's global scale, brand reputation, and broad vehicle line-up, which continues to generate strong interest among consumers.
The shares are trading at 5.6-times our 2023 EPS estimate and at 6.1-times our 2024 forecast, compared to a 16-year annual average range of 7-12. On other valuation metrics, the shares are trading below the low end of the historical range for price/book (1.0 versus a range of 1.2-2.2), at the low end of the range for price/sales (0.2 versus a range of 0.2-0.4), and below the midpoint of the range for price/cash flow (3.1 versus a range of 2.8-4.5). They are also trading at a price/EBITDA multiple of 2.8, below the low end of the range of 3.0-10.9.
Source: Argus Research [November 6, 2023 - proprietary source]
The Takeaway
We don't have to fool ourselves: Ford is going to experience increased operating costs due to the UAW settlement. Additionally, substantial capital spending is required, covering areas such as connected services and the transition to electric vehicles.
The automotive industry is highly sensitive to economic cycles. Economic downturns can lead to reduced consumer spending, lower demand for vehicles, and negatively impact Ford's sales and profitability.
Furthermore, I do not presume to claim that Ford is the best investment of all the companies in the industry. Look at the multiples and margins:
Due to the enormous negativity that has surrounded the company in recent months, I believe the stock is oversold and undervalued, considering the still relatively low inventories in the industry and the potential positive impact of cost-cutting and buybacks in future periods.
Based on the above, I rate F stock as a 'Buy' today.
Thanks for reading!
For further details see:
Ford: Everyone Is So Bearish, I'm Getting Bullish