- Ford Motor stock prices have been negatively impacted by a series of setbacks since July, nosediving from $15+ to the current level around $11. This creates a good entry point for long-term investors.
- Its issues (like the ongoing disputes with United Auto Workers, high-interest rates, and components shortage) are only temporary in my view.
- Looking beyond these near-term issues, F maintains a robust profit margin, owns some of the most iconic brand names and can invest sustainably for long-term growth.
- In the meantime, extreme market sentiment has compressed its valuation to a dirty cheap level.
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Ford Motor stock's rebound potential
The stock price of Ford Motor (NYSE:F) has been under tremendous pressure lately. As seen in the top panel of the chart below, F's stock price peaked above $15 in July and has been in nosedive to the current level of ~$11. There are good reasons for such corrections, and I will analyze several of the leading factors in the rest of the article (such as labor union disputes and macroeconomic uncertainties).
However, my thesis in this article is that these issues are only temporary. And when I look past these temporary setbacks, I see F as a fundamentally profitable company that now trades at a dirt-cheap valuation. This value-price gap creates an outsized return potential in my view. As you will see later, the company consistently maintains a robust profit margin and invests in long-term growth. Just by expanding our horizon a bit wider (see the bottom panel of the chart below), the total returns of its stock actually kept pace with the broader market during one of the most spectacular market bull runs. I will explain why I expect such past performance to not only continue into the future but also have good odds of beating the overall market given the large rebound potential thanks to the large value-price gap.
Ford and United Auto Workers union
Many of F's ongoing issues have been addressed by other SA authors, including several of my own articles such as its high CAPEX requirements and EV ramp-up. Thus, in this article, I will concentrate on a more immediate issue that is still evolving: the disputes between F and the United Auto Workers ("UAW") union.
Let me start with a brief recap for readers unfamiliar with the background of the disputes. The UAW union and the Detroit Three automakers (General Motors (GM), Ford, and Stellantis (STLA)) have a long history of disputes. The current round began in July 2023 and the main sticking points involve large pay raise (over 40%), restoration of pension plans, limiting the use of temporary workers, et al. The disputes are still not resolved, and negotiations are still ongoing. The negotiations are heating up as the strike deadline (Sept 14) approaches. It is very likely that UAW will authorize a strike if the parties cannot converge on an agreement by the deadline (97% of UAW members voted in favor of authorizing the strike in this case).
The disputes and strikes could certainly impact F in several ways as elaborated on immediately below.
How might the disputes and/or strike impact Ford?
First, the disputes could lead to higher costs for Ford (and hence lower profitability). As aforementioned, many of the UAW's demands can directly result in higher wages and benefits for its existing workers and also new hires. As commented by a GM executive, such significant costs "would threaten our ability to maintain our manufacturing momentum". The disputes could also damage Ford's reputation, image, and investors' confidence (as reflected in the large stock price decline since the dispute broke out).
Second, if a strike does materialize when the parties cannot reach an agreement by the Sept. 14 deadline, it could cause further damage to Ford. If the UAW goes on strike, Ford would most likely shut down some of its factories and halt production of its vehicles. This would lead to delays in getting vehicles to dealerships and customers, lost revenues, and also lost market share to other automakers who are not impacted such as Tesla (TSLA). All told, according to Deutsche Bank's analysts:
A strike could impact earnings by $400 million to $500 million per week of production impact for each OEM, for a total of $1.4 billion per week.
Therefore, I am not here to argue that these headwinds should be ignored. To the contrary, I foresee realistic and sizable impacts from these headwinds. My bull thesis is built on two pillars: A) F has the capability to absorb such impacts in the long term and B) the market has overacted.
Why is the market response overblown?
Despite its cyclical reputation, F actually maintains remarkable consistent profitability thanks to its popular product lineup. For example, its all-time best-selling F-Series continues to enjoy robust demand and rapid growth. As shown in the recent quarterly (2023 Q2) earnings report, its sales increased 34% YOY despite all the macroeconomic headwinds. As you can see from the following chart, its return on capital employed ("ROCE") fluctuated only within a relatively narrow range in the long term and consistently surpassed its weight-average cost of capital ("WACC") by a large margin. Details of my analysis method for ROCE and WACC can be found in my blog article. To wit, F's ROCE has been averaging 40.5% over the past decade, about a whopping 30% above its WACC of around 11%. Such a thick profitability cushion could easily absorb the impacts mentioned above in the long term. Furthermore, there is always a possibility (actually a good possibility based on my readings of past labor disputes) that the outcome of the negotiations could turn out to be better than what the market has feared. The parties could reach a compromise and the strike could be averted.
Valuation, other risks, and final thoughts
Yet, I view the stock's current valuation as compressed to the degree that reflects the worst possible outcome already. As seen in the chart below, its valuation multiples are in huge discounts in absolute and relative terms. In terms of P/E, it trades at 5.5x on a TTM basis, 56% below the sector average and 25% below its own 5-year average. In terms of P/S multiple, it is trading at 0.28x only, again far below the sector median and also its own 5-year average. In terms of P/cash multiple, it's only 3.3x on an FWD basis - simply absurd in my view.
To recap, there is no doubt that F has been under pressure due to a series of headwinds. Some of these headwinds are fading into the rear-view mirror now, such as the shortage of components caused by the COVID-19 pandemic. Some of the headwinds are still ongoing such as the labor disputes and high interest rates. And to irritate, my bullish argument is not built on the denial of these issues. My argument is that A) the impacts of these issues are only temporary, and B) the market overacted by assuming the worst outcome already. Looking past these issues, I see a company with ROCE consistently above the cost of capital and some of the most popular vehicles - both good signs of a strong and stable moat. To add to my optimism, the company's financial strength is in good shape (see the top panel of the chart below) and has the bandwidth to sustain or even increase its growth CAPEX (see the bottom panel below). A high ROCE, sound financial position, and sustainable reinvestment plan have always been a winning recipe in the long term in my experiences.
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This article was written by
Envision Research, aka Lucas Ma, has over 15+ years of investment experience and holds a Masters with in Quantitative Investment and a PhD in Mechanical Engineering with a focus on renewable energy, both from Stanford University. He also has 30+ years of hands-on experience in high-tech R&D and consulting, housing sector, credit sector, and actual portfolio management.
He leads the investing group Envision Early Retirement along with Sensor Unlimited where they offer proven solutions to generate both high income and high growth with isolated risks through dynamic asset allocation. Features include: two model portfolios - one for short-term survival/withdrawal and one for aggressive long-term growth, direct access via chat to discuss ideas, monthly updates on all holdings, tax discussions, and ticker critiques by request.
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.
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