Ford Motor Co. (F, Financial) announced on Monday that it will be lowering prices for its popular F-150 Lightning model. Although the company claimed supply-side variables drove the decision, the stock's subsequent slump suggests the financial markets interpreted the news as a sign of receding profit margins.
Financial markets often overreact to news, making it difficult to judge the amplitude of the newly received information. As such, I decided to decode the event and discuss other matters related to the stock.
Price cuts and Ford's key segment performance
Understandably, Ford's price cut statement shocked the market as demand for durable goods across the globe has resulted in softening results for some of the world's leading automakers. However, Ford maintained that lower prices for its electric truck are due to lower input costs instead of demand-side issues.
According to Chief Customer Officer Martin Gjaja, "Shortly after launching the F-150 Lightning, rapidly rising material costs, supply constraints and other factors drove up the cost of the EV truck for Ford and our customers. We've continued to work in the background to improve accessibility and affordability to help to lower prices for our customers and shorten the wait times for their new F-150 Lightning."
A few factors suggest Gjaja's statements can be substantiated. First, Ford released its latest North American sales report earlier this month, which revealed an 11.2% quarterly uptick in broad-based sales and a 34% increase in F-Series sales. Moreover, the company's F-150 Lightning experienced another solid quarter as it boasted an impressive 119% year-on-year increase in quarterly sales. Thus, the company's sales data dictates that demand remains robust, phasing out the possibility the price cut is demand-induced.
A second reason why Gjaja's statements might align with reality pertains to the competitive landscape of the electronic vehicles market. Ford and Tesla Inc. (TSLA, Financial) will attempt to cannibalize their competition within the North American EVs market to consolidate their market positions by raising the barriers to entry for new potential players.
Lastly, the U.S. government recently approved a $9.2 billion contingent loan to Ford for the development of three new electronic vehicle batteries. Many reports suggest the loan is contingent on price cuts, which might explain why the F-150 Lighting's prices are singled out.
Potential for lower input costs
An overlooked factor pertaining to Ford is its potential to recognize lower input costs after an abrupt downturn in certain manufacturing costs. For example, energy costs have diminished due to a slump in oil and gas prices. Additionally, shipping costs have depleted significantly since the turn of the year, leading to smoother up and downstream supply chains.
A combination of lower input costs and sustained sales volumes suggest Ford's gross and net profit margins might soon return to their all-time highs.
Capex cycle remains intact
A company's capital expenditure line item is worth a thousand words, often revealing a company's confidence about future results. Businesses regularly increase their capital expenditures whenever they anticipate strong sales, and the signs are that Ford has done just that.
The company's management expects capital expenditures to reach $8 billion to $9 billion by the time 2023's full-year results are filed, which is an upgrade from the previous year's $6.8 billion.
Ford is on an aggressive reinvestment route as it plans to expand its electronic vehicles segment while restructuring its internal combustion segment. However, the company's capex guidance probably would have been lower had Ford anticipated softer sales numbers.
Valuation
Although Ford's fundamentals seem strong, it does pose a few valuation risks. For one, the stock's price multiples indicate the stock is priced in with little value in store.
Further, I constructed a discounted cash flow model, which revealed a price target of $13.76. Thus, implying the stock is overvalued on an absolute basis.
I used the following input variables to construct the DCF model.
- A growth horizon of 10 years was combined with a terminal growth period.
- The company's free cash flow growth for the initial growth period was assumed at 9.01% and the terminal period at 3%.
- A discount rate of 10% was incorporated.
Dividends
Ford's forward dividend yield of 4.24% ranks within the 82nd industry percentile, showcasing why the stock is alluring to income-seeking investors. Although cyclicality often plays a role in its dividend policy, no material signs suggest its dividend payout will weaken anytime soon.
Final word
The market has acted unfavorably toward Ford's F-150 Lightning price cut, suggesting many believe diminishing profitability is en route. However, a recent sales report shows the company is subject to strong demand with a lower price allowing for a potential increase in market share and satisfying a contingent feature of its $9.2 billion battery factory loan.
Although valuation metrics suggest the stock is priced in, Ford's fundamentals remain robust, which could sustain its dividend profile and lead to steady value accumulation.
