2023-12-18 13:00:00 ET
Summary
- Ford has recovered most of its losses from the October selloff, corroborating my thesis that significant pessimism was priced into the stock.
- The company adjusted its EBIT guidance due to costs related to the strike, but management emphasized the strength of Ford's underlying business.
- Ford's EV ambitions and concerns about its ability to scale up remain sources of investor uncertainty.
- However, more robust macroeconomic prospects and a more dovish Fed set the stage for Ford's recovery in 2024 and beyond.
- A downgraded market outlook lowered the bar for Ford to outperform potentially. I argue why the time to add more exposure to F is timely.
My previous thesis on Ford Motor Company ( F ) hadn't worked out exactly according to my expectations, as F was hit by a steep selloff in October 2023 before dip-buyers returned in early November 2023.
Consequently, F has recovered most of the losses since my September update, as I urged investors to "block out the media negativity" on its UAW negotiations back then. Therefore, while the timing of my thesis could be improved, the sharp recovery suggests that significant pessimism was priced into F. However, F still underperformed the S&P 500 ( SPX ) ( SPY ) as investors grew increasingly concerned about the company's EV ambitions in the near- and medium-term.
Ford revised its total adjusted EBIT guidance at the end of November 2023 to between $10B and $10.5B, reflecting $1.7B in Q3 and $1.6B in Q4 for costs related to the strike. However, management indicated that Ford would have outperformed its internal guidance, excluding the strike impact. As a result, management underscored that "there’s strength in [Ford's] underlying business that’s out there."
I concur it looked bleak in early November for Ford holders, as the selloff appeared to take out its pivotal $10.6 support zone, spooking investors into bracing for the worst. However, it also led to a remarkable bottom, suggesting the market saw appeal in F at those levels, as the company's EV transition remains intact, albeit delayed. Management stressed that the company recognizes the "need for adaptation in a dynamic environment." As a result, the company needs to curtail its EV investments, accounting for "slower growth expectations." However, Ford is ready to "accelerate to remain competitive" if the environment becomes more constructive moving forward.
I assessed that Ford's near-term adjustments are not expected to impact its long-term strategy significantly. The company highlighted that it's in the process of tackling the structural cost issues affecting its overall competitiveness. Moreover, its decision to move away from fully autonomous driving technology is an astute strategic move, given the recent faux pas seen in General Motors's ( GM ) Cruise endeavors.
There are concerns about whether Ford could cut its dividends. Management indicated it aims to continue a payout ratio of "40% to 50% of their free cash flow to shareholders through dividends." Moreover, the company has prized the importance of maintaining a robust cash position without committing further to bolstering its dividend payouts to lift its appeal to income investors. Ford underscored its focus on maintaining a 20% ROIC target for its growth investments, which aims to improve long-term shareholder value. As a result, the company must maintain "available cash for strategic investments."
I assessed that recent investor sentiments over F have improved, although F is expected to remain in the penalty zone. It's pretty clear that F has failed to generate sufficient buying momentum above the $15.5 level over the past year, underpinning the critical resistance level of its consolidation phase.
Therefore, investor sentiments will remain tepid unless Ford can prove its ability to scale up and provide more confidence about meeting its medium-term adjusted EBIT target of 10% by 2026.
Despite that, the favorable tailwinds from a more dovish Fed in 2024 are expected to provide a further lift for F, which has likely been contemplated as it bottomed out in November. Therefore, a potentially more aggressive rate cut cadence could spur an upward valuation re-rating in F as the well-battered auto stocks recover, undergirded by constructive interest rate tailwinds.
Notwithstanding my optimism, I don't expect F to recover to its early 2022 highs anytime soon as investors adjust to the reality of harsher EV competitive dynamics. Following the disappointing guidance revisions by Ford and the increased cost impact of the UAW agreement, investors need Ford to scale rapidly. Bulls could point to F's attractive "A-" valuation grade as a defense to justify an upward re-rating. Bears are expected to continue banging the table on the company's unproven scale in the EV transition.
F price chart (monthly) (TradingView)
Consequently, fundamentals-only investors could have faced a challenging decision in assessing Ford's thesis. However, price action investors could point out that F recovered its crucial $10.6 support level in December. Therefore, F has recovered most of its October losses, baffling bearish investors who believed a worse plunge might be over the horizon.
What has changed over the past two months that could have markedly improved F's buying sentiments, resulting in a near recovery of most of its October losses?
We can't say that Ford has adjusted its EV annualized run rate higher since its recent revision because that hasn't happened. Worse still, BloombergNEF recently downgraded the overall EV outlook for 2024, corroborating Ford's decision to lower its growth expectations, as highlighted earlier.
Yet, "strangely," F bottomed out in November. Why? As I highlighted previously, "F's $11 critical support level has held firmly despite the negative pessimism fanned by the financial media."
In other words, the market forced a bear trap in November, setting off a capitulation in F to compel investors to sell at the lows before staging a remarkable reversal over the past two months.
It has demonstrated the robustness of F's $11 support zone again. With the steep reversal from its bear trap, I believe the worst is likely over. Although near-term volatility should be anticipated, adding more exposure closer to the $11 level seems appropriate. Ford investors can look toward a more constructive 2024, given the lowered industry expectations, helping to lower the bar for Ford to outperform.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Ford: Stunning Recovery Despite Bad News Strengthens The Buy Thesis