Ford Motor Co. (F, Financial) has given investors plenty of things to think about in recent weeks. A combination of weak earnings and a slowing global economy led to a bearish outlook for the automaker after a very healthy start to the year in January.
However, there are reasons to treat Ford as a contrarian play. It plans to navigate out of these issues and trades at an attractive valuation. In addition, the company's strong brand ensures it will have fewer issues in trying to carve out a niche in the electric vehicle space.
With the recent pullback, the automaker could be a great long-term value play, in my opinion. Execution mishaps and headwinds are baked into its valuation, which means the long-term growth prospects are not reflected in the price. I expect a strong rebound in the coming months as Ford executes its turnaround strategy and continues to make inroads into the EV market.
Tackling the supply chain crisis
The auto industry has experienced some big headwinds recently. Since 2020, automakers have been facing a shortage of semiconductor chips, making it difficult for them to produce cars in large enough amounts to meet consumer demand.
The problems with the semiconductor industry in 2022 created a shortage of chips that limited production and drove up prices, causing fewer people to be able to afford them. As such, Cox Automotive noted that last year's new vehicle sales in the U.S. were the lowest level since 2011.
Unsurprisingly, Ford did not escape the crisis. In the fourth quarter, the American automaker sold 479,769 vehicles, a drop of almost 5% from the year-ago period. It also marked the first time sales dropped below the 500,000-unit level in the last six years. On an annual basis, Ford sold 1,864,464 vehicles in 2022, down about 2.2% from the prior year. During the same period, $2 billion in losses were incurred from about $18 billion in profit the year before. The losses were mainly due to investments in Rivian (RIVN, Financial) and Argo AI.
Over the past year, Ford has faced significant challenges due to shortages, supply chain disruptions and production instabilities. The ongoing global pandemic has created unprecedented disruptions across the entire automotive industry, and Ford has not been immune to its effects. The company has struggled to secure critical components and materials, leading to production delays and increased costs.
The chip shortage has forced the company to reduce the production of its most popular models, such as the F-150 pickup truck, and prioritize higher-margin vehicles. As a result, Ford has had to cut back on production and delay new model releases, impacting its bottom line.
In addition to the chip shortage, Ford has faced supply chain disruptions due to the pandemic, particularly in Asia. The closure of factories and transportation disruptions have caused delays in delivering critical components, adding to the company's production challenges. These disruptions have also driven up the cost of raw materials, further impacting its profitability.
“We should have done much better last year,” President and CEO Jim Farley said in a statement. “We left about $2 billion in profits on the table that were within our control, and we're going to correct that with improved execution and performance.”
"About $1 billion of the $2 billion in lost profits was due to lower production and lost sales; the other $1 billion was in operational costs," Chief Financial Officer John Lawler added.
In response to the challenges posed by the global chip shortage, Ford is pursuing a multi-faceted strategy. One component of this strategy involves collaborating with suppliers and brokers to secure the necessary chips. Additionally, the company is redesigning its car computers to use different chips that are more readily available. According to Ford's leadership team, this approach is about being as flexible as possible in this challenging environment.
Looking ahead, Ford is optimistic about its prospects for increased sales volumes in the U.S. market. The company expects industry sales volumes to reach around 15 million vehicles this year, which should translate to stronger sales figures, particularly for its newer models. Overall, these initiatives demonstrate the company's commitment to overcoming the challenges of the chip shortage and positioning itself for success.
Recent sales numbers suggest supply chain issues are getting better
Despite experiencing supply chain issues, Ford's sales figures for February 2023 suggest the company is heading in the right direction.
Ford reported a surge in February sales last week, with a year-over-year increase of more than 20% as it looks to boost the production of its F-Series trucks and EVs. The automaker sold 157,606 vehicles in February, up 22% from the previous year and a 7.7% increase from January. This significant increase is especially noteworthy as Ford faced supply chain issues in February 2022, resulting in one of its worst sales months since 2021. So far, the same is not the case this year.
Last month, sales of Ford's F-Series pickups surged 22% compared to the same period last year, reaching approximately 55,000 units, including 1,336 units of its electric F-150 Lightning. Sales of F-Series pickups have increased by 15% year to date. Its electric vehicle sales, a significant focus for Wall Street, continue to climb, with an 88% increase from the previous year. However, EV sales only account for 2.9% of the automaker's sales through February. Despite the success of the electric F-150 Lightning, the automaker faced a setback as sales declined by 41% in February due to production and shipment halts after a battery fire. As of February, Ford has delivered 3,600 electric F-150 Lightning cars.
In February, Ford outpaced other automakers who reported monthly sales. Toyota Motor Co.'s (TM, Financial) sales declined 8.5% compared to the previous year, while Hyundai Motor Co.'s (HYMTF, Financial) sales increased 16.2%.
Although the automotive industry has grappled with supply chain and production issues, the situation is expected to improve over the next year. Industry professionals who spoke to The Financial Times predict supply shortages will get better by the end of 2023. This is good news for Ford, which has already taken steps to position itself for success when the industry bounces back.
Electric vehicle war
Tesla Inc. (TSLA, Financial) recently lowered its prices to increase its market share in the high-end EV market. In response, other auto companies, including Ford, have also started to cut their EV prices to remain competitive. However, there is a significant difference between the impact of the price reduction for the two companies.
Tesla's EVs make up a more significant portion of its total vehicle sales than Ford's do. This implies that Tesla will be affected more negatively by declining profit margins, while Ford's legacy internal combustion engine products can help finance the price war.
Despite this, Ford's legacy ICE products tend to be more cyclical, making them a liability in the current global economic slowdown.
Valuation
Ford is increasingly becoming a potential value opportunity due to its declining stock price. On the other hand, Tesla's stock price has moved away from reasonable valuation territory.
Ford's price-sales ratio of 0.33 is significantly lower than Tesla's price-sales ratio of 8.34, which places Tesla in the bottom 93.79% of companies in the vehicles and parts industry. In contrast, Ford's sales multiple is ranked better than 73.2% of companies in the same industry. General Motors Co.'s (GM, Financial) price-sales ratio of 0.38 is also higher than Ford's, indicating the latter may be a more cost-effective option for investors seeking exposure to the automotive industry.
While the price-sales ratio is just one of many metrics used to evaluate a company's valuation, the data suggests Ford may offer an attractive valuation proposition relative to its peers.
As such, the company appears to be better positioned to weather the price war due to its diversified portfolio and legacy ICE products.
Healthy payouts are another plus
Ford had a consistent track record of increasing its dividend until the financial crisis. Subsequently, the company cut its quarterly dividend payouts, with the reductions continuing until it entirely suspended them in 2007.
The company recommenced its dividend in 2012 and gradually increased payouts annually until 2017, when it faced challenges due to mounting expenses and investment outlays, resulting in a temporary halt in increases.
Similarly, during the pandemic, Ford suspended its dividend. However, despite being lower than the pre-pandemic payout of 15 cents per share, the automaker surprised analysts by reinstating its dividend earlier than expected and at a higher rate.
The fluctuating dividend history suggests the company has not maintained a stable payout over time. This choppiness can be attributed to the cyclical nature of the automotive industry, where the business' performance is subject to economic cycles and consumer demand. However, despite encountering many challenges and disruptions, Ford has demonstrated commendable resilience and steadfastness in fulfilling its commitment to shareholders. The company recently announced its quarterly dividend of 15 cents per share and a supplemental dividend of 65 cents per share.
Ford explained the additional dividend reflects the company's robust cash flow and successful monetization of its stake in Rivian Automotive, which is near completion. The overall distribution translates into a 6% payout or roughly one-and-a-half years' dividend income in one go.
The company's dividend yield is also noteworthy at 4.21%. This figure places Ford in a favorable position relative to its industry peers, as over 80% of them cannot match its yield. In comparison, General Motors, widely considered one of Ford's biggest competitors, has a significantly lower dividend yield of just 0.66%.
Takeaway
A well-known name in the automotive industry, Ford has been a leading manufacturer for over a century. However, the company has faced significant macroeconomic challenges recently. As a result, it has had to restructure and adapt its operations to remain competitive.
In response to these challenges, Ford is now prioritizing the improvement of its organizational structure and addressing operational issues. The company has simplified its product portfolio, reduced bureaucracy and invested in key areas like electric and autonomous vehicles. Ford has also been focusing on improving its supply chain, optimizing its production process and streamlining its operations.
Although investors may face difficulties soon, the expected economic rebound in the second half of 2023 suggest favorable conditions in the auto industry. I believe Ford's efforts to restructure and adapt to the changing market, combined with a solid yield, make it a compelling potential opportunity.
