- 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.
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.
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.
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.
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.
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.
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