Is Ford Stock A Buy, Sell, Or Hold After Recent Earnings?

Summary

• Ford reported pretty solid Q1 earnings results, however, the market remains concerned over its H2'22 production cadence and potential pricing normalization.
• Ford has staked its FY22 guidance on an elevated pricing environment to remain through the end of the year. But, the market seems to be pricing in weakness instead.
• We believe that Ford's stock valuation has normalized meaningfully from January. The market has digested its excessive optimism, culminating in a massive bull trap.
• We discuss why F stock remains a Buy after its Q1 report.
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Investment Thesis

Given the challenging macro environment and ongoing supply chain disruptions, Ford Motor Company (NYSE:F) reported a solid Q1 earnings card. Additionally, the headwinds from the Russia-Ukraine conflict were also exacerbated by the recent COVID lockdowns in China. Therefore, we are pleased with CEO Jim Farley and his team's performance, as Ford reiterated its FY22 adjusted EBIT guidance.

Moreover, the COVID lockdowns in Shanghai have also been easing at writing. In addition, critical industries, including automotive companies, have been "white-listed" to resume production. As a result, we believe that Farley's FY22 guidance looks sound even though some uncertainties over costs, inflation, and pricing ability remain.

Notably, the market focused on these headwinds, as the stock has continued to fall post-earnings. As a result, we believe that the market has been trying to price in these headwinds, suggesting that Ford's earnings could come in at the lower end of its guidance range.

Despite that, we think the digestion in F stock has improved its risk/reward profile significantly. However, we caution that the stock could still be digesting a "mega" bull trap that occurred in January. As a result, it could continue to see selling pressure while dip buyers try to defend a potential near-term bottom.

We reiterate our Buy rating on F stock after its Q1 earnings report.

What To Expect After Ford's Q1 Earnings

Management remained confident that it could deliver its FY22 adjusted EBIT guidance of $11.5B-$12.5B despite the headwinds depicted above. However, we think the Street seemed skeptical of its guidance as it assumes an elevated pricing environment, which could be prone to normalization. Notably, the market expects production and deliveries to ameliorate in H2'22 as chip supply disruptions moderate further. As a result, the market was concerned about whether the improved supply would impact Ford's pricing dynamics.

A recent WSJ report also accentuated the uncertainties resulting from the pricing dynamics. It added (edited):

The current retailing setup, with a fragmented landscape of independent dealerships striking individual bargains with buyers, doesn't lend itself to pricing discipline. Right now, manufacturers are more concerned about dealers selling vehicles for more than the MSRP, particularly in the US. But as soon as supply normalizes and consumer sentiment weakens, mass discounting seems bound to return-unless, that is, manufacturers and dealers can work together to revamp distribution. - WSJ

Therefore, we think the market could be pricing in the potential for pricing weakness driven by improved supply dynamics and weaker consumer discretionary spending. With the increasingly challenging macro environment, investors still recognize that Ford needs Ford Blue (Ford's legacy ICE division) to continue churning profits to help Ford Model e (Ford's EV division) scale up.

The Benchmark Company also weighed in, as it added (edited): "We see a tug of war in the market between economic concerns and upside opportunity, with the auto sector at the center of the debate."

F Stock Key Metrics

F stock NTM FCF yield % and NTM normalized P/E (TIKR)

There's little doubt that the market has continued to discount the efforts of legacy makers like Ford to make the transition to EV successfully. A glance over at its NTM FCF yield of 12.5% suggests that the market seems pretty pessimistic. However, the valuation is in line with its arch-rival General Motors (GM), with F stock slightly more expensive.

Moreover, the auto industry continues to trade at a P/E much lower than the market. For example, the auto manufacturers median P/E of 6.2x is much lower than the market's median P/E of 16.1x.

As such, F stock's current valuation seems pretty much in line with the market's median. Notably, it was 12.7x in January 2022, reflecting the market's excessive optimism four months ago. As a result, we think the digestion has been meaningful for F stock to lower expectations for a robust FY22 performance.

Is F Stock A Buy, Sell, Or Hold?

F stock price chart (TradingView)

In January, a massive bull trap thwarted F stock's upward momentum, as seen above. It followed a previous bull trap that occurred in mid-2021, which culminated in a "final flush" to set up the trap in January. We also cautioned investors in our January article (Hold rating) to wait for the digestion of the excess optimism.

The digestion has indeed taken place. But, note that while Ford's NTM P/E has moderated to the industry's median, it doesn't seem undervalued yet. Hence, there's still potential for further digestion in the near term. We believe that the market will continue its price discovery, factoring in the macro headwinds that could impact Ford's margins in H2'22. Moreover, we haven't observed any signs of consolidation that could suggest a potential floor yet.

Therefore, F investors should consider adding exposure in phases and dollar-cost average accordingly. But, we remain optimistic about its long-term thesis. We think Farley & team are well-positioned to lead Ford's historic transition to EVs.

Therefore, we reiterate our Buy rating on F stock.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.