ii view: Ford shares skid downhill on costs shock

This motoring mammoth raced higher in 2021 but the shares hit reverse in 2022. We assess prospects. 

Third-quarter update

• Expects third quarter adjusted profit of between $1.4 billion and $1.7 billion
• Reaffirms full year adjusted profit expectation of between $11.5 and $12.5 billion

ii round-up:

Auto maker Ford Motor Co (NYSE:F) has warned of supply shortages impacting its performance, resulting in an additional inflation-related $1 billion of supplier costs hitting the current third quarter. 

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Short supply of certain parts had left around 40-45,000 vehicles waiting to be finished, predominately higher profit margin trucks and sport utility vehicles, with the completion of such vehicles shunting revenue and profit into the fourth quarter. 

Ford shares fell by 12% in US trading, their biggest fall in percentage terms since early 2011, leaving them down by close to 40% year-to-date. General Motors Co (NYSE:GM) are down by around a third in 2022, while electric vehicle maker Tesla Inc (NASDAQ:TSLA) has fallen by just over 10%. The S&P 500 index is down by close to a fifth year-to-date. 

Ford did however reaffirm its expectations for full-year adjusted profit of between $11.5 billion and $12.5 billion, despite expectations for third quarter adjusted profit of between $1.4 billion and $1.7 billion. That’s below current Wall Street forecasts for nearer to $3 billion. 

Broker Morgan Stanley noted that “it was only a matter of time before supplier cost recoveries began to flow,” as it reaffirmed its ‘equal-weight’ rating and $14 fair value share price estimate.  

Ford’s third-quarter results are scheduled for 26 October.

ii view:

Ford designs, manufactures, markets and services a full line of connected, increasingly electrified passenger and commercial vehicles. It employs over 180,000 people worldwide. Most of its sales - around three-fifths - are made in its home nation of the USA. The UK, Germany and Canada also provide major markets, generating sales of between 4.6% and 8.2%. 

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For investors, supply chain challenges have now manifested themselves in higher prices, with competition for components intense across the auto industry. Costs broadly are rising given elevated inflation, worker wage demands generally are growing, while required investment into new electric vehicles continues. 

On the upside, Ford is now pursuing a plan for growth and value creation, combining existing strengths and new capabilities. The dividend payment has both been restarted since the pandemic and returned to its pre-Covid level, with the shares now sat on an estimated future dividend yield of over 3.5%. 

On balance, and while some caution remains sensible, an estimated future price/earnings (PE) ratio in single digit territory at least leaves the valuation looking undemanding, giving grounds for longer-term optimism. 

Positives

• Action to restructure the business taken
• Investing in electric vehicle products

Negatives

• Supply challenges
• Rising costs

The average rating of stock market analysts:

Strong hold