2023-11-02 12:00:00 ET
Summary
- Ford's weak Q3 earnings report and lack of guidance are likely to limit its upside and prevent share appreciation.
- The ongoing price war in the EV industry and worsening macroeconomic environment are contributing to Ford's disappointing performance.
- The new deal with the UAW will have a material impact on Ford's business, including increased costs and potential dividend cuts.
Ford ( F ) faces numerous challenges that are likely going to undermine its growth prospects and prevent its shares from greatly appreciating anytime soon. The latest release of the weak earnings report for Q3, the lack of further guidance, and the new deal with the UAW are more than likely to limit Ford’s upside in the foreseeable future. This is something that I warned about last month before the Ford’s shares depreciated by more than 20% since mid-September. Given the environment in which the company operates, I believe that it’s better to avoid investing in Ford even at the current price as its shares could continue to trade at the distressed levels for a while.
Disappointing Performance
Since the publication of my latest article on Ford, several major developments occurred that resulted in the over 20% depreciation of the company’s shares in a little more than a month.
The first major development happened last week when Ford released its Q3 earnings report, which showed that the company’s revenues during the period increased by 10.7% Y/Y to $41.18 billion but were below the estimates by $1.33 billion. At the same time, its non-GAAP EPS of $0.39 was below the estimates by $0.07.
Such a poor performance was blamed on the ongoing price war in the EV industry and the worsening of the macroeconomic environment. Even though the U.S. economy impressed everyone in Q3, the rising rates are making it harder for automakers to attract new customers and drive sales.
I’ve discussed this more in detail in my recent article on Tesla ( TSLA ) where I quoted Elon Musk, who has been saying that if the rates stay higher for longer, then it would become harder for consumers to acquire new vehicles. As we’re no longer in a ZIRP environment while the Federal Reserve is open to more rate hikes, investors should prepare for additional disappointing earnings reports in the following quarters. Add to all of this the ongoing price war that has already resulted in a contraction of margins for major players and made Ford’s EV business record an EBIT loss of $1.3 billion in Q3 and it becomes obvious that the worst for the automaker is not over yet.
The Downside From The UAW Deal Outweighs The Growth Opportunities
Even if we were to assume that the macroeconomic challenges and the poor performance of the EV unit were temporary, it would still be hard to justify opening a long position in Ford after it reached a new tentative agreement with UAW a couple of days ago. Under the new agreement, Ford is expected to immediately increase the wage of the lowest-paid workers by 88%, and the wage of the top earners by 11%. It has also committed to increase wages by 25% in the next four years, increase payments to the retirement saving plans to 10%, and make its temporary workers permanent once the deal is ratified.
While in reality, Ford had no other option but to make some concessions to end the ongoing strike, the new deal with the UAW would still leave a material impact on its business. Let’s not forget that its net margins are currently under 4% and under the new deal they would decrease by an additional 60 to 70 basis points as the cost to produce one vehicle is expected to increase by $850 to $950 per vehicle under the new deal. This would certainly make it harder for Ford to significantly improve its bottom-line performance anytime soon.
What’s worse is that the dividends are likely to be affected as well under the new deal. Seeking Alpha’s quant system already gives a grade of ‘F’ to Ford’s dividend safety category as the dividends are likely to be cut in the foreseeable future. The company was already cash flow negative in Q3, and given the potential impact of the new UAW deal on its business, the management would likely be prompted to look for ways to slash dividend expenses as its interest coverage ratio is below 2x.
At the same time, after Ford revealed its Q3 results, it decided not to provide any guidance for Q4 and beyond citing the uncertainty around the UAW strike. That didn’t stop the street from revising their estimates. If before the tentative agreement was reached the consensus was that Ford’s EPS in Q4 would be $0.27, then the current consensus is that the EPS would decrease more than in half and is expected to be only $0.12 in Q4. The same is true for the revenue expectations that were significantly cut in recent days. As a result of this, it becomes hard to justify a long position in Ford at this stage as the rising expenses that would result from the deal are more than likely to outweigh all the potential growth opportunities that the company could’ve offered before.
The Bottom Line
Considering all of those developments, it becomes hard to imagine how Ford’s shares would be able to significantly appreciate from the current levels anytime soon. Once the deal with the UAW is ratified by both parties, Ford’s bottom-line performance is expected to greatly deteriorate in years to come, while the worsening macroeconomic environment won’t help ease the blow. As such, I believe that it’s better to avoid Ford at this stage since there’s a high risk that its shares would continue to trade in a distressed territory for a while, especially if the dividends are cut and dividend investors start to look for better alternatives.
For further details see:
Ford: UAW Deal Is A Disaster For Shareholders