Ford: Enough Is Enough

Summary

• Ford’s Q1’22 earnings were impacted by a mark-to-market loss on the firm’s Rivian investment.
• Ford reaffirmed guidance for FY 2022 despite supply chain risks.
• Ford’s 45% drop from its high is exaggerated.

Justin Sullivan/Getty Images News

Supply chain problems have made investments in traditional and electric car brands unpopular recently, but dismissing Ford (NYSE:F) at this point of its electric vehicle transformation would be a big mistake. The car company is ramping up electric vehicle production aggressively and the launch of the F-150 Lightning pickup truck is a milestone event for Ford.

Ford's shares remain deeply undervalued and I believe the drop is exaggerated considering that the firm just reaffirmed its free cash flow guidance for FY 2022.

Despite a loss in Q1'22, Ford's earnings card was solid

Ford's revenues in the first-quarter dropped 5% year over year to $34.5B due to declining wholesale volume and currency headwinds. Ford's Q1'22 revenues were still better, however, than the analyst prediction of $31.2 billion.

Ford made a loss of $3.1B in Q1'22, chiefly because of an unrealized loss related to one of its electric vehicle investments. The car brand's adjusted EBIT was $2.3B, showing a decline of 41% year over year. Negative cost effects were partially offset by strong pricing for Ford's products.

Ford

Rivian price correction leading to significant mark-to-market loss for Ford

Ford is an investor in electric vehicle start-up Rivian Automotive (RIVN) which saw its share price decline by 50% in the first-quarter. Ford has a 12% stake in the electric vehicle company and has not sold its investment after the company's IPO last year. Ford's investment in Rivian was valued at $10.6B at the end of FY 2021 and at $5.1B at the end of Q1'22. Shares of Rivian have declined an additional 37% from the end of the first-quarter through May 2, 2022.

The drop in Rivian's market valuation resulted in a $5.4B mark-to-market loss in the first-quarter.

Ford

Guidance for FY 2022

The really good news for Ford shareholders last week was that the car brand reaffirmed its guidance for FY 2022. Ford continues to expect adjusted EBIT of $11.5B to $12.5B meaning the company anticipates up to $3.4B in adjusted EBIT contributions in the coming three quarters. Also important: Ford also maintained its free cash flow guidance for FY 2022 which calls for FCF between $5.5B and $6.5B despite mounting problems in the supply chain and higher commodity costs. Because Ford reaffirmed its FCF guidance, the Q1'22 decline in free cash flow stings much less than it would otherwise have.

Ford generated free cash flow of $(0.6)B in Q1'22 due to timing differences and negative working capital. Ford's guidance for FY 2022 implies that Ford will see a significant rebound in FCF in the second half of the year.

Ford

Cheap free cash flow valuation

Ford is cheap and the company is just about to start deliveries of its new F-150 Lightning pickup truck, Ford's electric vehicle flagship for which it has already received more than 200 thousand reservations. The chief reason to buy Ford at this point is the discounted valuation and the firm's huge potential to become a leading EV company this decade. Based off of free cash flow of $5.5B to $6.5B, shares of Ford are valued at 8.9-10.4 X.

Risks with Ford

The biggest risk for Ford is the supply chain crisis which is arguably not easing right now. Supply chain problems have the potential to delay the roll-out of Ford's new electric vehicles and slow the ramp of EV sales. Ford already had to idle its plants this year, due to semiconductor chip shortages, leading to lost production volume and weaker free cash flow. Rising commodity costs are also a risk for Ford and the stock because they are having a material impact on free cash flow. Ford's guidance for FY 2022 is based on the assumption that commodity costs will increase $4.0B year over year. If expenses increase more than that, Ford's guidance may be impacted.

I like Ford chiefly because of its growing EV product line-up and valuation. What would change my mind about Ford is if the supply chain situation got worse and the company cut its guidance for FY 2022 free cash flow.

Final thoughts

Enough is enough. Shares of Ford should not have dropped by almost half lately, considering that the firm just reaffirmed guidance for FY 2022 which helps shareholders maintain confidence in Ford's free cash flow potential. The launch of the new F-150 Lightning is set to further drive Ford's electric vehicle sales upwards and give its growing EV business additional momentum. Considering how much shares have dropped and how cheap Ford's free cash flow has become, shares of Ford continue to have a very favorable risk profile.

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.

Comments

[jj19912021]

People talk about higher interest rates I would say Fords lending for new vechicles would get a boost from higher rates

[Westfool]

@jj19912021

Nah, one of the only fully financed companies. Wait who needed money last time, who was forced too to not make the other cronies be so exposed to fools.

I love the symbol.... I don't Escape, own one, but say F y'all chumps and crooks (generally).

I would say my money never leave but I had a few more bucks... well it doesn't matter, I love Cali.... not cuz I love them.... but I love F and time will tell.

[HWONG2]

It’s too late for Ford to catch up with Tesla. Ford may go bankruptcy before 2030.

[FunInvesting]

If RIVN was 180 per share Ford would be trading in the 30's..simple...

[Chris Lau]

@FunInvesting Ford and another unnamed investor reportedly plan to dump up to 23M Rivian shares. $F Q4/21 to Q1/22 loss is $(1,752,600,000).

[JunkBondage]

@Chris Lau They should get the cash while they can, regardless of the loss. They have their own EV truck now. I don't understand why they tied up with RIVN in the first place.

[Westfool]

@JunkBondage

Smart old money move in a sense. Heck, why do you think the Chinese ever messed with the real Americans.

[deckofcards]

For the life of me I can’t understand why they haven’t unloaded their RIVN stake at the ridiculous valuations which were available to them. Dumb.

Cool. It’s an electric truck. Don’t you build those too?

[Naples Investor]

@deckofcards I think there was a lock-up period after the IPO.

[emcsqard]

@Jeff Durbin

May 9:
"There is also Rivian Automotive (NASDAQ:RIVN) with nearly 800M shares being freed up to be sold investors if they desire. Notably, that tally includes 100M shares of Rivian held by Ford (F) and 160M shares by Amazon (AMZN)."

[Westfool]

@Naples Investor

Naples, I hope u talkin Italy and not FL.

Your comment is exactly what I heard.

[PrettyInGreen]

You know it really has not been all that long that F was a $5 stock. The movement from that point to $15 is more newsworthy than the retreat from $25. And that movement was mostly based on the positive hype around the electric Mustangs...and now Lightning. And, yes, Tesla is way over priced, has been for a long time. The real question is whether F can make money on its major brands and pay a dividend worthy of a century old company that claims to know what it is doing.

[RickJensen]

@PrettyInGreen
You will get your answer in less than a year.

[Westfool]

@PrettyInGreen

Tesla is not a pure Auto company though..... well I thought.

[JunkBondage]

I agree though it would have been nice if you showed a comp chart with trading multiples compared with some other major auto producers to get a sense of relative valuation on a number of metrics. You only provide FCF multiple of Ford, and not of any other automakers.

[Michel68]

Production PROMISES are easy, plentiful and CHEAP !
Let's see how much they actually can PRODUCE.
This year will tell and I predict the RESULTS will fall short !

[Westfool]

@Michel68

Yeah I hate to underestimate demand. Although I don't need to lie, they really couldn't source enough materials IMHO.

[Dalit]

The risk I don't see addressed here is that rising interest rates will price people out of cars the same way it can price people out of homes. I rationalize that one by noting the high demand for Ford's products - they'll sell everything they build regardless.

At least I think so. Definitely willing to look at the other side of that idea.

[BayBry]

@Joe Union It will be interesting to see how sales of the E vehicles is affected by rising interest rates. You can get an E Mustang as your second car if the monthly payments are affordable. Relying on a electric vehicle as your sole source of transport seems really risky to me except for specific major Metros or for people who can charge at home and never need to drive outside the charging limit.

[Naples Investor]

@Joe Union Ford can subsidize the interest rate so it looks like sales prices are still high even though the buyer is getting the sales discount through the interest rate subsidy.

[Dmaddron]

i would buy at 11 due to consumer spending tightening. Ford makes a good product so that isnt the problem

[The Exception]

@Dmaddron lol....at no point has ford ever made a good product. Lol....sorry.

[jst]

@The Exception In denial and blinded by bias...

[Westfool]

@The Exception

The 2017 Escape Titanium SE was an amazing car especially for what it cost.... probably the best value and greeeeat car I've ever purchased over the last couple decades.

[RWilliam]

Typical ford for years! No positions here, long GM.

[Legacy Legends, LLC]

"Ford made a loss of $3.1B in Q1'22, chiefly because of an unrealized loss related to one of its electric vehicle investments"

Believe in yourself, invest in yourself, RIVN can't save you. This is why EV investors should have 80% TSLA and 20% speculation EV.

[2959]

So they divide up the operations, creating three separate business groups and good luck figuring out the leadership roles. Then, based on the hype, interviews and selling to the media, who wants to work in the Ford Blue division (ice). Farley will be President of Ford e in addition to CEO, so new hires (or existing) will not want to work at Blue which equals bad attitudes. Ultimately, the family maintains control (40% class B) with a dual-share structure. It's also hard to get excited about someone playing "catch-up". Still long/hold but only because I'm in at 6-9$.

[sixpackistan]

F is an appropriate ticker symbol for this garbage company. If it wasn't for the F-X50 line of trucks they'd have NOTHING.

[Doctorpm]

Ford is lost! I just tried to buy an $80,000 F250 for towing. Not a truck on the lot and all orders for 2022 have been canceled! Nationwide search for the same vehicle shows nothing available. Ford's chip supply chain has CRASHED! Plants have shut down. If you own F now you might want to get out while you can....

[TheBaron Investing]

@Doctorpm I thought they were shipping the chips they have to their electric vehicle line up?

[emcsqard]

@Doctorpm
I surmise that most are purchases deferred, not lost. That they can sell everything they have, and are backlogged is a much better (enviable) problem than having a lot full of vehicles that are not moving.

[arnold.bird]

“the firm's huge potential to become a leading EV company”

When will Ford start disclosing gross margins for its EVs? Until then, Ford is mystery meat.

[RickJensen]

@arnold.bird
Try never. If they tell you, they tell the competition.
You don't give up the 11 herbs and spices.

[Mellowphant]

@RickJensen That's an apples to tires comparison.

[arnold.bird]

@RickJensen AMD really messed up last night. They publicly disclosed their gross margins. Now Intel has their herbs and spices.

[New Adams]

Nobody NEEDS a pickup because almost every American HAS one already!

[User 50621003]

@New Adams That hasn't stopped Americans for the past 30 years upgrading their trucks like clockwork.

[ToMillions]

Reminds me of (fuboTV: Enough Is Enough)

[JRHighley]

Supply chains are going to get worse before they get better.

[The Asian Investor]

@JRHighley Probably, time to get some cash ready...

[cbroncos]

@The Asian Investor Is that before the recession or after?

[The Asian Investor]

@cbroncos before :)

[underdog6713]

I got back in F a few days ago. I was reading a story on ford to her and she said to use her cash in her account to buy Ford shares. I think now is the time.

[cbroncos]

@underdog6713 Too soon as a recession is around the corner.

[Ishi Kenjo]

I just don't trust Ford to seamlessly transition to ev's or even efficiently transition to new supply chains. Prove me wrong & I'll adjust. I'd rather miss some of the profit in their turnaround then assume it & be wrong.

[The Asian Investor]

@Ishi Kenjo What do you mean with you don't trust Ford to seamlessly transition?

[Actionable Conclusion]

@The Asian Investor

Perhaps he figures since no OEM has been able to transition with even a modicum of acumen... why assume Ford is nailing it now?

Every OEM except perhaps Hyundai/Kia... they are all floundering in EV production, whether out of Germany, Japan or Detroit.

Ford is def floundering in EV production... the greatly hyped Mach E is a prime example.

Farley can't cut the ICE umbilical cord.

[The Asian Investor]

@Actionable Conclusion ICEs are going to stay, nobody says they are going away right away...