Ford Motor: Why You Should Buy The Post-Earnings Dip
Summary
- Ford’s sales are roaring back, and Ford could be a winner as the US economy reopens.
- Ford faces supplier problems in Japan and a chip shortage which will hurt FY 2021 production.
- Chip supply problems and a related decline in output are short-term problems that don’t impact Ford’s long-term outlook.
Despite delivering results last week that outpaced expectations, Ford Motor's (NYSE:F) stock dipped due to concerns over constrained chip supply and production headwinds in 2021. The 9% drop last week is not warranted and Ford is a buy.
Why you should buy Ford's dip
Ford reported earnings for its 1st quarter last week that beat expectations. Ford’s total sales were up 7% Y/Y due to stronger pricing, a better sales mix and stronger currency effects. North American sales increased 5% Y/Y.
Compared to the 2nd quarter 2020, which included the low point of the pandemic, Ford has seen a strong rebound in auto sales across the globe. The first quarter showed accelerating sales growth in North America, Europe and China.
2019 | 2020 | 2021 | ||||
Revenue change Y/Y in % | 4th quarter | 1st quarter | 2nd quarter | 3rd quarter | 4th quarter | 1st quarter |
North America | -2% | -14% | -54% | 8% | -13% | 5% |
South America | -22% | -21% | -75% | -39% | -10% | -40% |
Europe | -1% | -16% | -51% | -10% | 1% | 13% |
China | -38% | -31% | -12% | 15% | -17% | 39% |
International Markets Group | -19% | -25% | -60% | -11% | 5% | 15% |
Total | -5% | -16% | -54% | 2% | -9% | 7% |
(Source: Author, Ford Earnings Releases)
The global rebound in sales could make Ford a reopening winner once COVID-19-related restrictions are lifted and business returns to normal.
In its 1st quarter, Ford sold $33.6b worth of vehicles, which was 7% more than in the year-ago period. Total revenues were $36.2b, including earnings from Ford Credit, and Ford should be able to slowly regrow its sales to pre-COVID-19 levels.
Ford's sales have started to recover and Ford’s EBIT margin has expanded to 13.3% in the last quarter. Ford’s free cash flow turned negative in the 1st quarter due to constraints on chip supply and higher inventory... which is becoming a short term problem for Ford.
2020 | 2021 | ||||
1st quarter | 2nd quarter | 3rd quarter | 4th quarter | 1st quarter | |
Free Cash Flow as adjusted ($B) | -$2.2 | -$4.8 | $6.6 | $1.9 | -$0.4 |
EBIT Margin as adjusted (%) | -1.8% | -10.0% | 9.7% | 4.8% | 13.3% |
Return on invested capital (%) | 2.5% | -3.1% | -0.4% | 1.0% | 8.2% |
(Source: Author, Ford Earnings Releases)
Ford’s free cash flow is expected to drop even more in the 2nd quarter due to a global chip shortage. Strong demand for consumer electronics products during the pandemic and the resumption of auto production have strained chip supplies and are forcing large companies such as Ford to scale back production.
Additionally, a fire at one of Ford’s suppliers added pressure on production, forcing it to warn about earnings risks in February. Because of this, Ford expects to lose 10% of its planned second-half 2021 production.
(Source: Ford)
The ongoing semiconductor shortage, which is not expected to be resolved until FY 2022, and Ford’s supplier problems in Japan imply a dip in production and free cash flow in FY 2021, but production should return to normal in FY 2022. Regardless, the semiconductor shortage and the resulting negative impact on Ford’s output pose a serious challenge to Ford’s free cash flow and valuation short term.
(Source: Ford)
Ford’s stock price plummeted 9% last week after it disclosed its outlook for FY 2021.
Ford’s production problems are not made in-house but are caused by third parties and market factors. Ford will have a disappointing second quarter and the correction last week reflects the production dip expected in FY 2021, but things should get slowly better after the June quarter and the supply shortage, although posing a risk short term, should be resolved as chip manufacturers invest to grow capacity.
Ford has a low valuation based on P-S and P-E ratios and the stock has potential to revalue higher as production problems are resolved.
| Market Cap | Est. FY 2022 sales | P-S Ratio | Est. EPS FY 2022 | P-E Ratio | |
| Ford Motor | $46.1b | $156.1b | 0.30x | $1.67 | 6.91x |
| General Motors | $81.5b | $148.3b | 0.55x | $6.37 | 8.98x |
(Source: Author)
Closing thoughts
Ford Motor is working through its pandemic-driven sales dip and it should be able to return to pre-COVID-19 sales around $150-160b a year once production functions normally again. Even if Ford's production takes a hit this year and output is lowered by 10% in the second half, these problems are not Ford's fault. Ford's valuation is low based on future sales and earnings estimates, and the stock can revalue higher once production problems are in the rearview mirror.
This article was written by
Analyst’s Disclosure: I am/we are long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (78)
For someone who claims to be looking into the future, you just caved.....
$60??? What happened.
You should have sold some puts.
My comment had nothing to do with cost of renting a vehicle. But to show there is a shorrtage of vehicles.
MORE SMOKE.
Controlling cost, that is what matters. If U follow what Ivan had to say, Ford is moving their shop closing to June & call him back in July the 3rd. Qt. Reducing cost in the 2nd. Qt.
(That would be now, if you don't already have a full position)
You could wait for Q2, but that's a 50/50 gamble.
