Ford (F) stock has been in a freefall, and closed below $10 yesterday for the first time since January 2021. The Detroit automaker is down 15% in 2023 amid the ongoing sell-off in automakers’ stock prices, and has now shed 35% from its July highs above $15. In this article, we’ll analyze why Ford stock is falling, and look at the way forward for the Dearborn, Michigan-based company.
Why Is Ford Stock Falling?
Ford reported its Q3 earnings last week, and not only missed consensus earnings estimates, but also withdrew its 2023 profit guidance – which, incidentally, it had raised during the previous earnings call.
The company also provided a tepid commentary on the electric vehicle (EV) demand environment, and delayed a $12 billion investment in its EV production capacity. Things are no better for rival General Motors (GM), which has also scaled back its EV production guidance while pulling out of a planned joint venture with Honda Motors (HMC) to develop small EVs.
That said, the earnings miss isn't the only reason that shares of Ford - or for that matter, GM - have been under pressure. Unions managed to get a good deal from the Big 3 Detroit automakers - but given the nearly zero-sum game of these contract negotiations, Ford estimates the new United Auto Workers (UAW) contract will add between $850 to $900 in additional costs per vehicle.
The company also talked about “quality” and “cost” issues after reporting massive warranty-related costs in the third quarter. The macroeconomic situation is not supportive for automakers, either, as a combination of higher interest rates, recessionary fears, and geopolitical tensions are keeping consumers and investors alike away from cyclical industries.
Is Ford Stock a Good Value Buy Now?
Ford stock trades at a forward price-to-earnings multiple of 5.6x. The valuation multiples might seem to offer good value – especially if we compare it with pure-play EV companies like Tesla (TSLA) – which trades at a multiple of over 75x.
However, only relying on the valuation multiples isn't the most prudent investing approach. Here are a few more factors to consider before buying Ford stock below $10 per share:
1. Ford’s Legacy Business Continues to Do Well
Amid all the gloom and doom, Ford’s legacy business - which includes its internal combustion engine (ICE) business, Ford Blue, and commercial business, Ford Pro - continues to do well, with pre-tax profits of around $1.7 billion each in the third quarter. The strong performance of the legacy business helps Ford absorb the losses in its EV business, which it expects to lose $4.5 billion in 2023.
2. Ford Has the Flexibility to Pivot Its Production
While Ford has scaled back on its ambitious EV production plan and no longer expects to reach an annual production capacity of 2 million vehicles by 2026, it has the advantage of being flexible between ICEs, hybrids, and EVs. The EV market is looking quite challenged amid the brutal price war, and even Tesla’s operating margins are now down below 8%. However, by being flexible about its investments and production, Ford can optimize profitability by shifting focus away from lower-margin products.
3. Ford+ Transformation Plan
Ford’s transformation under the Ford+ plan remains a work in progress, but is billed as a strategy for “growth and value creation.” The company is targeting structural improvement in margins under the plan.
4. A Strong Product Portfolio
Ford has a strong product portfolio and among others, it sells the F-150 pickup. The ICE version of that vehicle has been America’s best-selling pickup for almost half a century now, and the model’s electric version also had a good start - especially as Tesla hasn’t yet been able to produce its Cybertruck, with even CEO Elon Musk acknowledging that there are “enormous challenges in reaching volume production with the Cybertruck and then in making a Cybertruck cash flow positive.”
5. Ford’s Dividend Yield Is Now Over 6%
If dividends are your thing, then Ford is among the stocks that you can consider given its over 6% forward dividend yield. That's not only three times the S&P 500 Index’s ($SPX) dividend yield, but it's also the highest among major listed automakers.
Key Risks That Ford Investors Need to Watch Out For
Meanwhile, there are several risks that Ford investors should watch out for. First, the global automotive industry is going through the biggest upheaval since Ford came up with its Model T. Tesla’s relentless price war is not helping matters, either, and things might get worse before they get better.
Second, even Ford’s ICE business might suffer if the U.S. economy deteriorates further. Car sales invariably fall in a recession, and so do the share prices of car companies.
Finally, CEO Jim Farley has a tough task at hand as he tries to steer Ford toward becoming a legitimate Tesla competitor. Among others, leadership needs to address cost and quality issues that he highlighted prominently during the Q3 earnings call. While Farley gave Tesla as an example during the Q3 call and said that Ford needs to be “totally competitive on cost,” the projected increase in its production costs following the UAW contract – which it intends to offset through higher efficiencies - will make that a task easier said than done. While the company has taken several actions to transform the business, a lot more needs to be done, which Farley has also admitted.
All said, I would still be a buyer of Ford shares at these prices. While the automotive industry faces some serious headwinds, Ford has a good enough brand and a compelling product portfolio to survive the current turmoil. The stock might still fall from these levels - but given that Ford's market cap is south of $40 billion, which looks quite low, and the stock even trades below book value now, I believe the risk-reward looks quite reasonable.
On the date of publication, Mohit Oberoi had a position in: F , GM . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
