Ford: Firing On All Cylinders, Almost (NYSE:F)

A Comprehensive Review of Ford

I have written a lot about Ford (NYSE:F) recently and gotten a ton of feedback and questions in the comments section from both the bulls and the bears. An overwhelming amount of private message requests have been made of me to do a more comprehensive review of the company since I was actually once a Ford Auditor while working for Ernst & Young in my earlier years. In this article I will do my best to lay out just the facts, like Joe Friday from Dragnet! Let’s get started!

Latest Earnings

Ford actually missed by a hair on both the top and bottom lines last quarter. Nevertheless, this did not sway the swagger of the bulls as the stock has risen approximately 10% since that time. Even though Ford’s earnings were somewhat mixed, CEO Jim Farley, as always, managed to put a positive spin on it. When reading over the earnings call transcript, I noted one of Farley most important statements that may be the cause for the ebullient response to earnings. Farley stated:

“Our ambition to be the leader in EV is already taking shape. In our home market, Ford Model e is now — has now had incredible successful launch of three products. They’re now in scaling F-150 Lightning, Mach-E and E-Transit, and each are attracting, interesting for us, almost all new customers. So, this is growth. We’re now the number two electric brand in the U.S., and we’re just beginning with our scaling.

Our decision to create Blue for both ICE and hybrid vehicles has focused and energized our team to leverage what we do best at Ford. We have launched a string of hits that our products — our customers not only love, but have lined up to buy, and we have so many more exciting products to come.

We have made tough capital allocation and restructuring decisions like the one today, particularly in South America and our international market groups like India and our results and cash flow, you could see in our results, have improved dramatically. Our balance sheet remains strong. We ended the quarter with nearly $50 billion in liquidity, even as we accelerate investments in connectivity and electrification.”

The next earnings announcement is on 2/2/2023.

Upcoming Earnings estimates

Analysts are expecting earnings and revenue to increase substantially across the board for the upcoming earnings report. Keep in mind this is after several announced downward revisions to their estimates. Looking at the Seeking Alpha revision data, there were 3 upward revision and 7 downward revisions. Now, some may perceive this as a negative, yet I see it as actually a positive. I was a high jumper in high school. I can tell you this from experience, the lower they set the bar the easier it was for me to jump over it! Ha! So, I embrace lowered expectations. When it comes to earnings, it’s all about beating expectations, not the raw numbers. My 30 years in the market has taught me that much at least! Another aspect of Ford is the fact that it is vastly underperforming the market in general.

Ford Stock vs. S&P 500 one year performance

The market is down, yet Ford is really down. The S&P 500 is down approximately 20% while Ford is down 50%. Ford appears to be attempting to bounce off the lows presently. It looks like the bottom may be in, more on this later. I would like to get into the fundamental aspects of the stock prior to digging deeper into the technical status. When analyzing prospective equity investments, I always do my due diligence on the fundamentals first. The reason being, if the company doesn’t pass the fundamental smell test, there is no reason to waste time and go any further. So, now let’s dig in to the Seeking Alpha quantitative metrics, shall we?

Ford’s Seeking Alpha Quantitative Rating

I have found the Seeking Alpha Quantitative metrics and ratings to be an invaluable tool when assessing the health of a company’s financial condition. The quant ratings provide an unbiased view based solely on the empirical data. I like the fact that all the bias has been taken out of the equation. The overall quant rating is a Buy at present. All the individual factor grades score above average with only the momentum category scoring a C. That, among a couple other issues is why I added the “Almost” to the title. I couldn’t justify stating that Ford was firing on all cylinders at present. The fact of the matter is there are a couple areas of weakness. Let’s start off by checking under the hood of the profits category. See what I did there! Ha!

Ford Profitability Grade A+

Sometimes these data points can be confusing. It’s hard to see how Ford could have some weak spots, yet still score an A+ in regards to profitability. Here is the catch. These numbers are all trailing two month numbers. So they are basically lagging indicators. Further, the one A+ line item is cash from operations, which rightfully has the highest weighting out of the bunch as this is the most important statistic. Moreover, they knocked the ball out of the park with $9.2 billion coming in. So Ford passes the profitability test with flying colors. Now let’s move on to Ford’s growth prospects.

Ford Growth Grade A

Ford scores an A for growth with the company looking very strong in EBIT (earnings before interest and taxes) with solid year-over-year and forward results. What’s more, EPS diluted growth and ROE (return on equity) growth are both up substantially year-over-year. So Ford is definitely doing well where it counts the most. I am satisfied they will continue to grow into the future. They just became the second leading EV car maker in the US and have substantial order backlogs as a matter of fact. That is saying something. Ok, so we have determined that the company is profitable and growing. This is great. Yet, as Warren Buffett always says, “Price is what you pay, value is what you get.” Therefore, the next step in the analysis is to see if the stock is under or overvalued based on the current stock price versus the cash coming in the door, so to speak. Let’s now turn our attention to the valuation metrics.

Ford Valuation Grade B+

Ford is definitely undervalued both on a historical and relative basis. It’s currently trading for 3.18 times price to cash flow which is 72% lower than the sector median. What’s more, with the current forward P/E of 6.38, the company is trading at a 55% discount to its peers and a 23% discount to its 5 year historical average. In one of my previous pieces I was harangued by leaving out the PEG ratio which is Price/Earnings to Growth. Ford comes in at 0.69. Anything less than 1 is considered undervalued. Based on these facts, Ford is no doubt highly undervalued. This is mainly due to the fact the company has seemed to be unable to get it together in the past. Several forays into various markets have turned out to be abject failures. This caused Ford to cut nearly 80% of the money losing models over the past five years. Ford is definitely in the midst of a turnaround. Management has made some great strides, but they are out of the woods just yet. Even so, the way to make money in the market is to buy low and sell high. I like the fact the stock is still out of favor. Ford passes the valuation test. In conclusion, Ford has jumped through all the fundamental hoops. Now we can move on and address a few of the individual aspects that seems to be of interest to most perspective buyers. The safety of the dividend and the debt load. Let’s tackle the dividend first.

Ford’s Seeking Alpha dividend grades

Ford recently suspended and subsequently reinstated its dividend. Then raised it a smidge. These start and stop issues regarding the dividend payments are why the Seeking Alpha quantitative scores for dividend safety, growth, and consistency are all Fs. The lone positive is the yield at 3.95%. Even so, I do not see the company cutting or suspending the dividend again anytime soon. I believe Farley is smart enough to know that would be the death knell for the stock. So, I give the dividend a pass. Consider it icing on the cake. The real money will be made in capital appreciation. Before we move on to the final test, the technical status, I want to address one of the constant issues/questions that comes up, Ford’s debt load.

Ford’s Debt Analysis

Fitch Ratings recently assigned a ‘BB+’/’RR4’ rating to Ford Motor Company’s proposed issuance of senior unsecured green bonds. Moreover, Ford’s Long-Term Issuer Default Rating is ‘BB+’. The Rating Outlook is Positive. Fitch states:

“Ford’s ratings and Outlook reflect expected improvements in the company’s profitability and core FCF, which will likely lead to margins and credit protection metrics that are in line with Fitch’s positive rating sensitivities for the company over the intermediate term. Although supply chain and inflationary pressures are likely to continue for much of 2022, Fitch expects Ford’s profitability to improve as it benefits from ongoing redesign activities, as well as execution on its Ford+ plan.”

So Fitch, which has dug much deeper than I ever have or could into the debt of Ford, states they feel positive about it. One thing I’ve learned over the years is sometimes you have to outsource certain areas of your due diligence. Analyzing the debt is one of these for me. I do, however, want to address Ford’s total debt load which often gets questioned by those unfamiliar with the company’s business structure. There are basically two major pieces to Ford’s company, Ford Automotive and Ford Motor Credit.

Ford Total Debt Breakdown

What you will often see in the comments section of the Ford articles is someone aghast at the $140 billion in total debt on Ford’s books. Well, let me ease your minds and clue you in to what’s really going on here. By reviewing the debt attached to each of the two major segments of the company. As you can see by the above chart, a majority of the debt resides within Ford Motor Credit, FMC. This is a finance arm of the company and this debt is “asset backed” by the vehicles they sell. So it’s being paid off by the customers and provides profitable cash flow for the company. It’s not a liability, it’s actually an asset. Analyzing FMC’s debt is actually a counter intuitive endeavor. It’s actually a positive when it’s higher and a negative when it’s lower. This is due to the fact it’s a tell on how well sales are going. If Ford is selling a bunch of vehicles, then FMC will be financing many more and the debt load increases. It’s vice-versa when sales are down. When Ford sales tank, FMC’s debt decreases. So Ford has no issues regarding the debt at present. Now that Ford has passed all the requisite fundamental tests, it’s time to take a look at the technical status of the stock and see if it’s time to buy.

Ford Momentum Grade C

This is where the Ford bull case starts to fall apart, for me, unfortunately. The stock is down substantially over the last year posting a 50% drawdown, which I like. Further, it has shown positive relative strength over the past 6 months. Nevertheless, the stock has been unable to break out above strong resistance over head at the 200 day SMA.

Ford current chart

The stock is still in a well-defined downtrend and was summarily rejected at strong resistance at the top of the downtrend channel and the 200 day SMA, which happen to be one and the same. It’s going to be tough busting through this level, especially in the current highly uncertain macro market environment. Market participants are presently on pins and needles awaiting the most telegraphed recession of all time. So what am I going to do?

Ford current chart

At times like these, I am going to need to see Ford’s stock break through the strong resistance overhead and stay there for at least few weeks. This would be the first sign that a trend reversal is underway and the bulls have taken charge. When a stock is down this far and still in a downtrend, there is no hurry to put your hard earned money at risk. I have learned over decades in the market that at times like these it’s best to wait and see signs of a trend reversal prior to opening a new position. There will be plenty of upside to be had as the stock is down 50%. Now let’s me wrap this piece up.

Investor takeaway

Ford is a great company and has superior management. What’s more, Ford is profitable, growing, and undervalued presently. Ford has no debt issues and I see the dividend as being safe. The one drawback is the fact the stock is still in a downtrend and seems unable to break above strong resistance overhead. If I was long presently, I would not sell. I believe Ford will get it together and break out of the downtrend eventually. If I was looking to start a new position, which I am, I am willing to forfeit the first 10% of upside to improve my risk/reward odds. This is due to the fact the stock has a long way to run once it is able to break out above the 200 day SMA. I hope you enjoyed this review! Those are my thoughts on the matter, I look forward to reading yours!