2023-09-29 16:00:00 ET
Summary
- Ford's prospects remain mixed due to the lack of EV production scale, pulling down the company's overall profitability.
- Its EV adoption is plateauing as demonstrated by the growing inventory/slower sales, worsened by the higher borrowing costs of 7.4% compared to the 2019 average of 4.63%.
- The UAW strike has already triggered furloughed headcounts and idled production, potentially impacting its near-term deliveries.
- The pay raises may also add an additional $1.6B burden on its operating expenses, naturally posing further headwinds to its margins.
- As a result, we concur with Seeking Alpha Quant's warning that F may be at high risk of cutting its dividends again, with more stock volatility ahead.
The Ford Investment Thesis Has Been Destabilized By UAW's Pay Raise Demand
We previously covered Ford Motor ( F ) in July 2023, discussing its mixed prospects as EV adoption plateaued, partly attributed to the elevated interest rate hikes and the automaker's lack of production scale.
These had contributed to the Ford Model e's sustained lack of profitability, naturally pulling down the company's overall financial performance over the past few quarters of transition to electrification.
For now, F's prospects are further impacted by the ongoing UAW strikes, with the union demanding a drastic pay increase by +36% (down from the original demand of +40%) on top of a 32-hour work week.
As similarly observed by Elon Musk , these demands are alarming indeed, likely "to drive GM, Ford, and Chrysler bankrupt in the fast lane."
This also explains why many other EV startups, such as Tesla ( TSLA ), Lucid ( LCID ), and Rivian ( RIVN ) have often used " restricted stock units and employee stock purchase plans for a big part of overall compensation," emulating many of the Big Tech companies out there.
For now, F reports annualized FQ2'23 selling, administrative, and other expenses of $11B ( +9.7% QoQ /inline YoY), similar to FY2019 levels of $11.16B (-2.1% YoY). Depending on the eventual agreement with UAW, we expect to see this sum drastically increase, potentially to $12B (+9.1%) or up to $12.6B (+14.5%):
- For example, the automaker has temporarily committed to an increase in the average wages from $78K to between $92K and $98K for 57K UAW-Ford workers moving forward, implying a drastic increase of +21.7% at the midpoint. This alone may have an impact of up to $969M annually, putting further strain on its profit margins, with an estimated annualized selling, administrative, and other expenses at approximately $12B.
- If F is to acquiesce to UAW's demand of a +36% increase instead, we may be looking at a much higher average wage of up to $106.08K instead, implying a much higher annualized selling, administrative, and other expenses at approximately $12.6B.
If we are to superimpose the $12.6B of expenses against the FQ2'23 consolidated income statements, we may arrive at an approximate net income of $1.51B (-20.8%) and EPS of $0.37 (-21.2%), suggesting a serious impact on the automaker's bottom line.
These numbers are alarming indeed, especially since F's top line has been underwhelming with impacted production and sales numbers, as further discussed below.
F's Production/Delivery Cadence Suggest Impacted Consumer Demand
Ford US Sales 2023
Investors must note that F has had a tough H1'23 (including July and August 2023 ), with minimal growth in overall sales at 1.34M units YTD (+8.9% YoY), with the EV segment underperforming at 38.92K units (+6.5 YoY).
Ford Production/Sales 2023
Based on F's latest production cadence as of August 2023, with only 65.05K units of Mustang Mach-E and 421.71K units of F-150 produced (with the Lightning variant undisclosed), we can understand why the management has decided to push back its previously ambitious EV production guidance to 2024 instead.
The management has previously guided 600K EV production run rate in 2023, comprising 270K in Mustang Mach-E and 150K in F-150 Lightning.
With the production cadence likely to suffer, F investors may want to brace for short-term impact indeed, with deliveries/sales likely to suffer in FQ3'23, if not through FQ4'23, with the UAW supposedly having more than " enough money to pay all of its members for as long as 11 weeks."
Based on the historical UAW strikes ranging from 40 days in 2019 to 113 days in the 1940s, it remains to be seen how long the walkout may last indeed.
Based on F's growing inventory for Mustang Mach-E at 20.5K units ( +4.4K units MoM ) in August 2023, it appears that demand has been impacted by the higher borrowing costs as well, currently at 7.4% (+0.22 points QoQ/+2.41 YoY) compared to the 2019 averages of 4.63%.
The combination of underloaded production, moderating demand, and growing inventory may prove fatal to the automaker's FCF margins of 6.4% ( +4.8 points QoQ / -2.5 YoY ) and balance sheet with net cash of $10.59B (+12.3% QoQ/+2% YoY) by the latest quarter.
As a result, we concur with Seeking Alpha Quant's warning that F may be at a high risk of cutting its quarterly dividends, currently at $0.15, triggering further volatility in its stock prices.
So, Is F Stock A Buy , Sell, Or Hold?
F Valuations
As a result of the uncertainties, it is unsurprising that the F stock's valuations have also been drastically discounted compared to its 5Y averages and the sector medians.
This is especially in comparison to Tesla's FWD EV/Sales of 7.67x, FWD EV/EBITDA of 43.61x, and FWD P/E of 71.66x, with the latter obviously being not unionized, and therefore, safe from the ongoing strikes.
F 1Y Stock Price
For now, the F stock has already returned much of its recent gains, with it trading sideways at $12s. While there appears to be notable progress with the UAW, resulting in the strike being limited to a single plant as opposed to the expanded walkouts for GM and Stellantis, it remains to be seen when we may see a resolution .
Perhaps this is why F has paused the ongoing construction of its Michigan battery plant in collaboration with CATL, as a potential bargaining chip, with the management seemingly unconfident about its ability to competitively (read: profitably) operate the plant.
Even then, with more and more plants being idle due to the apparent parts and labor shortage, it is unsurprising that F has had to lay off 600 headcounts , with GM and Stellantis following suit.
As a result of the potential volatility, we prefer to rate the F stock as a Hold (Neutral) here, especially due to the drastic impact on its margins if the management caves into UAW's demands.
We maintain our cautious outlook, in that the stock is not suitable for the impatient, with the legacy automaker unlikely to achieve TSLA's economy of production scale over the next few years.
For further details see:
Ford: No Way Out From The UAW Pain