It would be fair to say that Ford Motor Company (NYSE:F) has been a revelation of late. Last May, I claimed Ford was a hidden gem in plain sight, and the stock has rallied a staggering 110% ever since, surpassing my intrinsic value estimate of $21.59 per share assigned at the time. Ford stock, in every sense, has exceeded my expectations, which brings a new challenge this new year as we, at Leads From Gurus, should determine whether now is the time to book our gains. To formulate a rational, data-driven answer to this question, I thought it best to evaluate the outlook for Ford in 2022. My findings show - despite some headwinds - that Ford stock is still undervalued.
A good place to start this discussion is to look at recent trends in Ford's earnings. As you should know, the global semiconductor shortage has made life difficult for almost all automakers, so understanding how Ford is coping up with these challenges could reveal important details about where Ford is headed this year. Ford Motor is investing millions of dollars in new technologies to keep up pace with the dramatically changing automobile industry and to gain a competitive advantage in the electric vehicle market, which is something that I want to reiterate before discussing recent earnings.
On October 27, 2021, Ford released financial results for the third quarter that topped analyst expectations. Increased availability of semiconductor chips and higher vehicle shipments helped the company earn 51 cents per share, compared to EPS of 27 cents per share expected by analysts. The company reported revenue of $33.2 billion for the third quarter, which was a 4% decline in comparison to the corresponding quarter last year. This does not come as a surprise considering the supply chain headwinds experienced by the automobile industry today.
Regional product shipments in North America increased 67%, while profitability improved in Europe, where Ford remains the leading commercial vehicle brand. Retail sales of luxury Lincoln-brand vehicles increased 24% year-over-year in China, and during the quarter, the company launched direct-to-customer Ford Select city stores to cater to the growing demand for BEVs in China, as well as started production of its all-electric Mustang Mach-E in Chongqing.
The company is actively expanding its mobility segment, preparing for large-scale autonomous vehicle operations in U.S. cities. On September 15, Ford, Argo AI, and Walmart, Inc. (WMT) announced that they are working together to develop a last-mile autonomous car delivery service for customers in Miami, Austin, Texas, and Washington, D.C. The last-mile delivery service will deliver Walmart orders to customers using Ford self-driving test vehicles equipped with the Argo AI Self-Driving System.
High demand for new products, strong sales in all regions, and further investments in connected BEV leadership reflected positively on Ford's third-quarter performance, which was notably better than the second quarter of 2021. This success came on the back of some improvements in access to chips used in vehicle production.
Ford's recent earnings, in my opinion, highlights that the company is moving in the right direction to mitigate the threat arising from supply-side challenges while executing its turnaround strategy to position itself as a leading player in the EV industry.
Ford began its transition to a greener future with the debut of battery-electric compact crossover SUV, Mustang Mach-E, in late 2020 in the U.S. With the unveiling of the Mustang Mach-E, Ford placed itself in the fast-growing EV market and the all-electric crossover SUV won Car and Driver's EV of the Year award in 2021 as well, beating ten other vehicles, including three Tesla models.
Amid the increasing demand for EVs, Ford is set to debut the electric version of the F-150 pickup truck early this year. Ford said last November that reservations for the F-150 Lightning truck have surpassed 200,000 units. As I highlighted last May, the all-electric F-150 will not only help the company gain traction as a formidable EV maker but will also boost the confidence of investors. From a valuation perspective, Ford is still very much valued like a traditional automaker - not an EV company - and I believe the expected success of the F-150 Lightning truck to be a historic milestone that helps the company bridge the valuation gap with EV makers.
Ford released the Ford Maverick, a lower-cost full hybrid pickup truck, in 2021 and plans to start delivering an all-electric E-transit van in early 2022 as well. On the other hand, sales for Ford's existing electric vehicle models continued to gain traction last November. Ford sold 11,116 electric vehicles in November, with Ford Hybrid models accounting for 4,767 units and Mustang Mach-E SUVs accounting for 3,088 units. In addition, the company stated that its share of the electric car market increased to 10% in 2021, up from 5.4% in 2020. Ford also plans to increase its global EV capacity to 600,000 vehicles in two years, making it the second-largest EV manufacturer behind Tesla, Inc. (TSLA).
In 2021, the automobile sector was hit hard by production delays due to supply chain challenges. The chip shortage is expected to continue through 2022, which might result in Ford reducing production targets once again. Last September, Alix Partners predicted the persistent semiconductor shortage will cost the global automobile sector 7.7 million units in 2021, up 97% from its May forecast. On the other hand, the new Covid-19 variant and the recent outbreak of infections are also posing a threat to the recovery of the automobile industry. Although there might not be another global lockdown, the increasing cases are likely to force companies to operate with limited capacity while discouraging consumers from discretionary spending. Inflation will be another key concern this year since rising raw material costs might eat into Ford's profit margins.
The demand for semiconductors will remain high as the automotive industry transitions to next-generation smart and all-electric vehicles. Therefore, manufacturers must consider strategic options for meeting this rising demand and addressing chip shortages. Ford announced a partnership with GlobalFoundries Inc. (GFS) to design semiconductors on November 18 to deal with the ongoing irregular chip supply that has hampered the industry since the outbreak of Covid-19. The two companies have reached a non-binding agreement under which GlobalFoundries will produce extra chips for Ford's current vehicle lineup. Furthermore, in order to meet the growing demand for semiconductors in the automotive industry, the companies plan to work on new chip research and development, such as autonomous driving chips, in-car data networking chips, and battery management chips, which will be used to power electric vehicles and autonomous driving systems. Although I believe this partnership will not necessarily help Ford come out of the chip crisis this time around, I will be keeping a close eye on how this partnership will move forward this year as I believe access to high-end, customized chips could help Ford achieve its electrification goals faster than I initially thought it would.
2022, arguably, could be a make-or-break year for Ford Motor Company. The company is certainly moving in the right direction, but every company that moves in the right direction does not necessarily go on to make it big in the long run. The unique thing about Ford, as far as I see, is that the company has what it takes to make it big. Ford makes the most-loved truck in America (F-150), and the country is moving towards reducing carbon emissions, and Ford is responding by electrifying the F-150 and some more to stay on top of the game. The early success of Ford's electrification strategy, which is evident from the stellar demand for F-150 Lightning, suggests the company is due for a valuation re-check in the market. Wall Street does not seem to agree, for the time being.
Wall Street average price target for Ford
Source: Seeking Alpha
Back when I built my first valuation model for Ford last May, I thought 2021 would be a better year than this, so I updated my model today to reflect the negative impact that we are seeing from the chip shortage. Below are my updated revenue projections for Ford, which take into account the positive impact expected from the launch of EV models of popular trucks.
|Fiscal year||Original estimate (May 2021)||Updated forecast|
*All numbers are in USD millions
Although my revenue projections have gone down notably, I have made a significant update to the discount rate used in my calculations, from 9% in May to 8.5% today, and this is because I now see that Ford's EV strategy is coming to fruition. Back in May, I had few numbers to work with, but today, I can see that the F-150 Lightning is going to be a massive hit. The next major change comes to the exit multiples used in my model. Last May, I used a revenue multiple of 1.5 to calculate the terminal value, but today, I am using a revenue multiple of 1.8 to derive the terminal value as I believe Ford's expected success with EVs will expand valuation multiples meaningfully in the future.
With these updated assumptions, the intrinsic value estimate for Ford stock comes to $29.58, which implies an upside of 22% from the current market price. With this, I believe Ford stock is still a buy even at these prices, and the rally is probably just getting started.
Ford served us - by us I mean the members of Leads From Gurus - well last year, and I am optimistic of what 2022 holds for the legacy automaker. Arguably, 2022 will turn out to be a historic one for the company with the launch of F-150 Lightning. I am optimistic about the performance of Ford stock this year as well, and I believe the company is still undervalued in the market.
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This article was written by
I am an investment analyst with 7 years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities. Please click the "Follow" button to get timely updates on new articles.
I am the founder of Leads From Gurus, a Marketplace service on Seeking Alpha that focuses on uncovering alpha-generating opportunities.
I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, and GuruFocus.
I'm a CFA level 3 candidate, an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK), and a candidate in the Chartered Wealth Manager program.
During my free time, I enjoy reading.
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.