2023-12-16 09:30:04 ET
Summary
- F remains a Hold (Neutral), attributed to its reduced EV productions through 2024, thanks to the intensified competition from multiple legacy/start-up automakers.
- The pessimistic combination of $8.8B profit headwind through 2028 and the projected declines in its FCF generation in FY2024/ FY2025 compromises the automaker's ability to sustain its dividend payouts.
- Readers must also note that F's balance sheet has been deteriorating to $29B in cash/short-term investments (-2.5% QoQ/ -9.2% YoY), with the only consolation being its stable debt levels.
- While some may opt to chase its expanded forward dividend yields of 5.42%, they must also note that the Seeking Alpha Quant already warns that there is a high risk of a dividend cut ahead.
- It may be more prudent to wait things out a little.
We previously covered Ford Motor (F) in September 2023, discussing its mixed prospects, attributed to the lack of EV production scale and decelerating demand, pulling down the company's overall profitability while inflating the automaker's unsold inventory, respectively.
Combined with the uncertain results from the previous UAW strikes and impacted near-term productions, we had preferred to rate the stock as a Hold then.
In this article, we shall discuss why F remains a Hold, attributed to its reduced EV productions through 2024, thanks to the intensified competition from multiple legacy/ start up automakers, with the automaker likely to achieve underwhelming EV performance through 2024 until the Gen 2/ 3 are launched.
This is on top of the updated impact of $8.8B in profit headwinds through 2028 from the UAW contracts, with it playing out as expected in our previous article.
The projected declines in its FCF generation in FY2024/ FY2025 compromises the automaker's ability to sustain its dividend payouts as well, worsened by the deteriorating balance sheet health.
The F Investment Thesis Remains Impacted Over The Next Few Years
For now, the recent FQ3'23 earnings call has brought forth excellent automotive revenues of $41.17B ( -2.9% QoQ / +10.6% YoY), adj EBIT of $2.19B (-42% QoQ/ +21.6% YoY), and adj FCF of $1.2B (-58.6% QoQ/ -66.6% YoY).
At the same time, the previous UAW strike has triggered a production headwind by about -80K units by the end quarter and up to -100K units by the conclusion of negotiation. After previously withdrawing its FY2023 guidance, the management has released its updated numbers, with an adj EBIT of $10.25B (-1.4% YoY) and adj FCF of $5.25B (-42.3% YoY) at the midpoint.
The impact is not as bad as expected indeed, compared to the previous guidance of $10B (-3.8% YoY) and $6B (-34% YoY) offered in the FQ4'22 earnings call, respectively, with the latter only attributed to the higher capex of $8.5B at the midpoint (+38.4% YoY).
However, it is apparent that the F management faces bloated inventory issues, with $18.32B reported in the latest quarter (+3.5% QoQ/ +20.4% YoY) compared to FY2019 levels of $10.78B (-3.9% YoY).
The same is suggested by the Model e's worsening EBIT margins of -75.6% (-16.7 points QoQ/ -32.5 YoY), naturally pulling down the automaker's overall EBITDA margins to 5% (-3.4 points QoQ/ +0.4 YoY) in FQ3'23.
This is on top of the automaker's lackluster EV retail sales of 56.26K units YTD (+17.3% YoY) with Mustang Mach-E and F-150 Lightning combined, and E-Transit at 6.1K YTD (+6.5% YoY), a pale comparison to the projected annualized EV capacity guidance of 600K offered in the FQ4'21 earnings call.
From these numbers, it is understandable why F has cut the projected EV capex plans by approximately $12B, while delaying its second BlueOval SK JV battery plant in Kentucky and putting the BlueOval Battery Park Michigan plant on hold.
In addition, the automaker has had to "take out some Mustang Mach-E production from FQ3'23 onwards," while "dialing back its planned output for F-150 Lightning in 2024 ," as a way to "adjust future capacity to better match market demand."
The combination of these factors imply that the automaker's gen-1 EVs may be destined for underwhelming intermediate-term performance indeed.
On the one hand, we may see a near-term improvement in F's overall EBIT margins, since the Ford Blue and Ford Pro remain decently profitable thus far, potentially allowing the management to sustain its shareholder returns.
This will also allow many dealers to clear their existing inventories without having to overly mark down the Average Selling Prices and further impacting the Model's e gross margins.
On the other hand, readers must also remember that F is set to navigate a challenging transition to the UAW contract, with it expected to bring about $8.8B worth of headwinds through April 2028, or the equivalent of $1.76B annually.
While the management has aimed to offset the additional costs through "higher productivity and lower expenses," it is apparent that the automaker faces an uphill battle ahead as projected in our previous article.
Readers must also note that F's balance sheet has been deteriorating to $29B in cash/ short-term investments by the latest quarter (-2.5% QoQ/ -9.2% YoY), with the only consolation being its stable long-term debts of $19.2B (inline QoQ/ YoY).
The Consensus Forward Estimates
Perhaps the $1.76B UAW headwind is why the consensus have cut their estimates for F's bottom line performance, with it expected to report impacted EBIT margins of 4% by FY2026, compared to 6.5% in FY2022.
F Valuations
F's impacted profitability through 2028 also explains why its FWD EV/ EBIT valuation of 15.42x and FWD P/E of 5.99x have been drastically discounted, compared to its 1Y mean of 16.45x/ 7.24x, 3Y pre-pandemic mean of 28.24x/ 7.11x, and the sector median of 13.89x/ 15.54x, respectively.
Based on its YTD adj EPS of $1.74 (+27.9% YoY) and the management's FQ4'23 adj EBIT guidance of $0.85B (-61.3% QoQ/ -67.3% YoY), we believe that the automaker may hit the consensus FY2023 adj EPS estimates of $1.88 (inline YoY) after all, with the UAW strike pulling down its full year performance.
Combined with the current FWD P/E valuation of 5.99x, it appears that the stock is also trading near its fair value of $11.26.
With the automaker's profitability expected to be somewhat inline over the next few years, we also believe that the F stock may trade sideways at these levels in the intermediate term.
As a result, F investors must temper their intermediate term expectations, especially since its reversal may be prolonged thanks to the profit headwinds from the UAW strike.
So, Is F Stock A Buy , Sell, or Hold?
F 5Y Stock Price
For now, F appears to be well supported at the $11s, after bouncing off the October 2023 bottom of $9s.
On the one hand, we maintain our cautious optimism that the stock's October bottom may hold, with the CPI/ PPI already cooling by October 2023 and the Fed unlikely to further hike interest rates.
This is on top of the declining lithium spot prices, triggering the moderating battery pack prices, with EVs likely to achieve price parity with ICE vehicles by mid-2026 assuming a new normal in the Brent Crude oil prices at $70 per barrel moving forward.
Therefore, while the average Car Loan APR Rates are still elevated at 11.6% for used vehicles and 7.4% for new vehicles by November 2023, compared to 8.2% and 5.4% in December 2019 , respectively, we believe that the peak is already here.
On the other hand, we reckon that F may lose its F-150 EV Truck throne in the near-term, with Rivian (RIVN) seemingly unaffected by the uncertain macroeconomic outlook.
This is attributed to the latter's raised FY2023 production guidance to 54K units (+121.8% YoY) while commanding an improving Average Selling Price of $85.92K in the latest quarter (-3.1% QoQ/ +5.4% YoY).
This is on top of Tesla's (TSLA) Cyber Truck launch by late 2023, triggering further headwinds to F's EV truck sales in the intermediate term.
These factors paint a pessimistic picture indeed, with us preferring to maintain our Hold rating.
While some may opt to chase F's expanded forward dividend yields of 5.42%, they must also note that the Seeking Alpha Quant already warns that there is a high risk of a dividend cut ahead.
It goes without saying that investors must size their portfolios according to their risk appetites, since they must "be careful about relying on this dividend for their income."
The same has been reflected in F's TTM impacted Dividend Coverage Ratio of 1.23%, compared to the sector median of 2.67%. The automaker is unlikely to hike dividends over the next few years as well, attributed to the projected decline in its FCF generation to $3.86B in FY2024/ $4.83B in FY2025 and its annualized dividend obligations of $2.4B.
It may be more prudent to wait it out a little, with things only to lift once the macro outlook improves, EV parity is achieved, and its Gen 2/ 3 products are launched by sometime 2025.
For further details see:
Ford: This May Be The End Of Its First-Gen EVs