Ford Can Revalue Higher As Chip Shortage Eases
Summary
- Ford raised its FY 2021 EBIT guidance by 50%, now targets a minimum of $9.0B in earnings this year.
- Ford expects the chip supply shortage to ease in the second half of the year and volumes are expected to grow 30% compared to the first half of 2021.
- Ford is seeing red-hot demand for its upcoming all-electric F-150 Lightning truck, which is expected to start selling in spring 2022.
- Shares of Ford trade at 12.2 times free cash flow and are undervalued.
Ford (NYSE:F) is seeing growing momentum in its electric vehicle business with reservations for its F-150 Lightning pickup truck soaring. Ford’s FY 2021 earnings guidance received a big upgrade last week, in part because Ford sees the supply situation for semiconductors improving. Based on free cash flow and profit growth, Ford is cheap and the stock is a buy!
Ford may be undervalued based on free cash flow
Ford said last week that it expects the chip supply shortage to ease in the second half of this year which should chip away at the uncertainty regarding Ford’s production ramp. Ford expected to see a 10% decrease in production for the second half due to the semiconductor supply shortage. Because of an improved flow in semiconductors to Ford’s factories, the car brand now sees a 30% volume increase in the second half of the year compared to the first half. Production chokepoints due to the shortage were the biggest risk for Ford, short term. Ford raised its full-year EBIT (adjusted) forecast by a massive $3.5B and now expects to have earnings totaling $9.0B to $10.0B while last quarter’s guidance called for a $5.5B to $6.0B EBIT only. This is a 50% upgrade in earnings Q/Q and, if achieved, Ford will increase its EBIT by a factor of 3.2 compared to the pandemic year, as business slowly returns to normal. EBIT for the second half of the year will be lower than earnings in the first half due to higher commodity and structural production costs.
(Source: Ford)
Ford’s free cash flow dropped 77% in FY 2020 because of the pandemic, and then the semiconductor supply shortage negatively affected Ford's forecast. But due to a strengthening product line-up, better car prices and an expected volume jump in the last six months of the year, Ford’s free cash flow is projected to soar in 2021. Ford guides for free cash flow of $4.0B to $5.0B in FY 2021, indicating a minimum increase of 166% over the pandemic year.
(Source: Ford)
In the table above, Ford’s FY 2020 free cash flow is shown as $0.7B which differs from the figure shown in Ford’s Q2’21 earnings forecast, which is $1.5B. This difference is the result of a restatement of Ford’s financials because Ford Credit is now included in the firm’s tax calculations. If Ford earns $4.5B in free cash flow in FY 2021 (implying 200% Y/Y growth), Ford’s business is valued at an FCF multiplier factor of 12.2… which is below the average of the last three years. If free cash flow comes in at the top of guidance, $5B, Ford would be valued at only 11 times free cash flow. In the pre-pandemic years 2018 and 2019, Ford's year-end free cash flow multiplier factor was 11.5 and 13.1. I calculate Ford’s historical FCF multiplier factor by dividing Ford’s year-end market capitalization by the annual free cash flow realized in each individual year. This approach just shows Ford’s valuation at one point in time (at year-end), but it nevertheless indicates that Ford today may still be undervalued based on free cash flow when compared against FY 2018 and FY 2019 valuations. Ford does not give guidance for cash flow from operating activities.
2018 | 2019 | 2020 | FY 2021 Guidance | |
Market Capitalization | $32.1 | $36.5 | $34.9 | - |
Free Cash Flow | $2.8 | $2.8 | $0.7 | $4.5 |
FCF Multiplier Factor | 11.5 | 13.1 | 53.6 | 12.2 |
Cash Flow From Operating Activities | 15.0 | 17.6 | 24.3 | - |
OCF Multiplier Factor | 2.1 | 2.1 | 1.4 | - |
(Source: Author)
Surging reservations for Ford's F-150 Lightning truck
Besides positive comments about a better flow of semiconductors in the second half and a much better earnings/free cash flow guidance for FY 2021, Ford surprised me with the strong reservation status of the all-electric F-150 Lightning pickup truck, which is expected to hit the market in spring 2022. Ford has now secured 120,000 reservations, showing a 20% increase since the beginning of July. About 77% of those reservations came from customers that never bought a Ford vehicle before. Ford is already selling electric/hybrid vehicles such as the Escape and the Mach-E SUV, but the F-150 Lightning truck really marks Ford’s first foray into the all-electric pickup segment. Ford’s EV business is starting to see some real momentum and electrified vehicle sales - which will be released next week - likely continued to soar in July.
Risks with Ford
Ford’s improved guidance lowers risks for Ford’s stock, but risks remain. The semiconductor situation may get worse if COVID-19 outbreaks disrupt global supply chains again, which is a possibility. Since the Delta variant is spreading rapidly and lockdowns are once again discussed as measures to safeguard public health, there is a risk that the pandemic, and related supply chain problems, could last longer than expected. The semiconductor market is undersupplied and will continue to see a supply deficit at least until the end of the year. An unexpected disruption in the flow of semiconductors and new factory shutdowns are a risk for Ford’s stock. What would also change my opinion on Ford is if the company scrapped its free cash flow guidance... which obviously would be a negative event for the stock as well.
Final thoughts
Ford made a splash last week as it materially raised its forecast for earnings and free cash flow for FY 2021. Although shares of Ford gained 44% year-to-date, Ford may still be undervalued based on free cash flow which received higher multiplier factors before the pandemic. The upgraded guidance indicates less risk and more upside for Ford. With production/factory output returning to normal in the second half, Ford is set to revalue higher.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of F either through stock ownership, options, or other derivatives. 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.