In recent years, stocks in the automobile industry have garnered attention from investors primarily due to one reason - growing adoption of electric vehicles (EVs). When it comes to EV stocks, the market has largely been dominated by Elon Musk-led Tesla (TSLA) and China-based rivals like Nio (NIO), Xpeng (XPEV), and Li Auto (LI), among others.
Outside this small group, there's one iconic auto brand that is making notable moves in the EV space. Even better, its valuations are looking attractive at current levels, and the company has a long history of paying consistent dividends to its shareholders over the years.
We're talking about none other than Ford Motor (F). So, in a rapidly changing market of consumer's auto preferences, how is Ford positioned to challenge its electric auto rivals?
About Ford
Founded in 1903 by the legendary Henry Ford, Ford Motor is a pioneering name in the field of commercial automobiles globally. Based out of Detroit, Ford operates in over 125 markets worldwide, with a presence in countries like China, the U.K., and India, among others.
The company, which commands a market cap of $47.87 billion currently, offers a healthy dividend yield of 5.05%.
Shares of Ford have had a lackluster 2023 so far. On a YTD basis, Ford stock is up just 2.4%, compared to gains of for the S&P 500 Index ($INX) and Nasdaq Composite ($NASX), respectively.
That said, there's reason to believe the pullback in Ford is a buying opportunity for investors looking to gain EV exposure.
Solid Q2 Results, EV Outlook Cautious
Ford reported robust numbers for the second quarter, as both revenue and earnings surpassed estimates. Automotive revenues rose by 11.8% from the prior year to hit $42.3 billion, above the consensus estimate of $40.38 billion. EPS for the period showed a comparatively slower yearly growth of 5.9% to $0.72, but still outpaced the consensus estimate of $0.55 per share. Over the past five quarters, EPS has surpassed the expectations of the Street on four occasions.
Wholesale unit sales for all its key segments, namely Ford Blue (which focuses on its traditional internal combustion engine, or ICE vehicles), Ford Pro (which focuses on commercial vehicles and services), and Ford Model e (which focuses on sales of EV and related services), were up year-over-year in Q2.
Meanwhile, EV growth appears to be experiencing some hiccups. In the second quarter, Ford Model e reported revenues of $1.8 billion. That's up 38.5% year over year, but represents just 4% of total company revenues. Ford added that it's set to lose about $4.5 billion in the EV business this year, wider than the $3 billion a year before, as CEO Jim Farley warned, “The near-term pace of EV adoption will be a little slower than expected." Further, Ford now expects to reach a 600,000 per year EV production run rate in 2024 - a milestone it previously expected to reach this year.
Moreover, the automaker's recall of its F-150 pickup trucks, along with industry-wide concerns over the United Auto Workers (UAW) strike, also remain headwinds.
That said, with the stock already down more than 14% since its late July earnings report, many of these concerns are likely already reflected in the current share price.
Valuation
On a relative valuation basis, Ford is trading at what appears to be reasonable levels, compared to both a more traditional automaker in General Motors (GM) and a more pure-play EV rival in Tesla.
Ford is trading at a slightly higher valuation on all key metrics when compared to GM. Whether it is forward price/earnings (F - 7.48 vs. GM - 4.75), price/sales (F - 0.28 vs. GM - 0.27), price/book (F - 1.09 vs. GM - 0.64), or price/cash flow (F - 3.70 vs. GM - 2.11), General Motors is trading at lower levels across the board when compared to Ford. However, the valuation gap between the two automakers is fairly modest.
On the other hand, Tesla is currently trading at a forward p/e of 79.97, p/s of 7.84, p/b of 14.48, and p/cf of 52.87. It seems safe to say Ford is trading at considerably cheaper levels than Tesla at the current juncture.
Analyst Estimates
Analysts remain confident about Ford's earnings growth prospects. The consensus is expecting earnings growth of 33.33% for the current quarter and 12.23% for FY23.
Overall, analysts have attributed a “Hold” rating on the stock, and the average price target of $14.92 indicates expected upside potential of roughly 26% from current levels. Out of 14 analysts covering the stock, 4 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, 5 have a “Hold" rating, and 3 have a “Strong Sell” rating.
Final Takeaway
Ford has large reserves of cash (about $26.4 billion at the end of Q2), and the brand value to strengthen its position in the rapidly growing and dynamic EV space. This, combined with its relatively attractive valuations and healthy dividend yield, makes Ford a compelling choice for investors who are looking to gain exposure to the EV industry, but prefer a stock with solid reputational and operational strength to complement its potential for future growth.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
