Marina113
Ford (NYSE:F) just released an update on the effects of inflation and part shortages and although the headlines may seem bad, some of the data they released along with those headlines have me convinced now more than ever that the company’s long term prospects are strong.
This is because although these initial numbers of an added $1 billion in costs related to inflation and the transition of some revenue realization from Q3 to Q4, there is not shift in demand for their gas-powered vehicles, their hybrids or their all-electric ones, and demand should remain high.
Let’s dive into the thesis.
Expectations & Valuation
The basis of my thesis and the reason why I’ve been long the company since my grandfather bought me a dozen shares of the company back in the early 90s is that the company, excluding a few years in the early 2000s, has been at the forefront of innovation in the automobile world. And with some of the most popular cars on the planet and certainly in the United States, they have the opportunity grow their sales by a substantial amount as they introduce hybrid and all-electric vehicles to consumers, which carry a higher price point.
This in turn has resulted in the company expected to report a more steady revenue growth over the next several years compared to other companies like General Motors (GM). Let’s do a quick overview of these net income projections in the form of earnings per share for reference:
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| Ford | $2.08 | $1.99 | $1.94 | $2.19 | $2.62 |
| +30.6% | -4.10% | -2.81% | +13.3% | +19.3% | |
| GM | $6.86 | $6.43 | $6.34 | $6.97 | $6.47 |
| -2.91% | -6.31% | -1.35% | +9.89% | -7.27% |
(Source: Seeking Alpha Earnings Estimates – Ford & General Motors)
As we can clearly see, Ford is expected to easily outperform General Motors’ EPS growth over the next 5 years, especially after 2025, which now includes more electric vehicle release expectations for both companies, reflected in these numbers. This is mostly due to higher expected margins on their vehicles as Ford has done more work on transitioning their factories and such, which General Motors is still doing and thus the cost point for them should be higher for the next few years.
This difference can be seen in the companies’ revenue comparison, which are quite similar when averaged out through the time period ending in 2025:
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| Ford | $146.8B | $159.2B | $166.4B | $165.5B | —- |
| +16.4% | +8.49% | +4.48% | -0.51% | —- | |
| GM | $154.0B | $164.0B | $166.3B | $180.1B | —- |
| +21.3% | +6.48% | +1.39% | +8.30% | —- |
(Source: Seeking Alpha Earnings Estimates – Ford & General Motors)
Looking at these growth rates and financial health, the companies are in shockingly similar position except for Ford’s expected higher margins. This is also down to my personal view that Ford’s brands are likely to emerge as better all-electric sellers than General Motors over the longer run past 2025 given the investment that they’re currently putting in and planning for 2025.
Given these factors, it’s quite clear that Ford is slightly undervalued in the longer run relative to General Motors and the industry as a whole, where projections are made, which adds a bonus for long term investors with the recent price drop off of the most recent headline news:
| 2022 | 2023 | 2024 | 2025 | 2026 | |
| Ford | $2.08 | $1.99 | $1.94 | $2.19 | $2.62 |
| +30.6% | -4.10% | -2.81% | +13.3% | +19.3% | |
| 7.09x | 7.39x | 7.61x | 6.71x | 5.63x | |
| GM | $6.86 | $6.43 | $6.34 | $6.97 | $6.47 |
| -2.91% | -6.31% | -1.35% | +9.89% | -7.27% | |
| 5.82x | 6.21x | 6.30x | 5.73x | 6.18x |
(Source: Seeking Alpha EPS Multiples – Ford & General Motors)
As we can see by the comparison, Ford is trading quite adequately right now relative to General Motors but the further out we go, the more the disparity is seen as Ford grows its earnings per share by a CAGR (compound annual growth rate) of 10.5% while General Motors grow its earnings per share by a CAGR of -1.76%.
This means that in terms of both valuation and investment, Ford is far superior the further out we go and with the 10.5% of current growth rate for EPS, will in all likelihood outperform peers and the broader market.
Now To Specifics – Ford Lightening & Such
First let’s deal with the updates – there are 2 parts:
The first is that 40,000 to 45,000 vehicles, which should have been delivered throughout the current third quarter, are going to be sitting ‘on wheels’ and waiting for parts to be delivered, which are delayed due to the supply chain shortages stemming from port lockdowns during the pandemic.
While this may be slightly bad news for the coming quarter, the company stated that orders are still high and that these will simply be delivered in the next quarter, Q4, instead. This means that maybe for short term traders it may be a negative, for long term investors this changes nothing as the annual figures shouldn’t be impacted almost at all.
The second is that they expect to incur $1 billion in higher costs in the current quarter relative to previous expectations due to inflation, or companies billing them higher amounts for the same parts. This without a doubt hurts some of the company’s profits but given that these are high margin products and the expenses would not be permanent – there’s little reason for long term pain.
The other part of this is that the company is working to lower overall expenses and pay down debt to avoid higher interest expense payments as interest rates rise in the United States. Both of these factors will, I believe, offset a good chunk of this rise and that the company can later make up for the rising costs by increasing the cost of their vehicles by a tiny fraction.
Conclusion – Buying The Dip!
The recent headlines, which sent shares down about 4.5% in after-hours trading, about the company incurring an additional $1 billion in expenses in Q3 as well as them shifting some deliveries to Q4 means that shares will likely spend the next few days in limbo.
For long term investors, this means that the company’s shares will be trading at a likely discount given that the shifting of deliveries shouldn’t hurt the company’s long term prospects at all and the additional $1 billion in expenses will be resolved in future orders with increased price points.
A 4.35% fall in share price equals to about $2.6 billion in market value as their current market capitalization stands at above $59 billion. So if we directly translate this to the company’s share price, long term investors such as myself can enjoy the company on a discount of about 2.5%.
Overall, the long term prospects of the company have not changed and as they are expected to grow earnings at a CAGR of 10.5% over the next 5 years as they introduce new all-electric and hybrid models and vehicles, I expect them to beat the overall market and certainly peers like General Motors.
This 10.5% annual compounded return means that with their highly sustainable dividend payment (payout ratio is 10.4% of earnings) yielding just over 3%, that the average returns over the next 5-10 years can reach 15%.
As a result, I remain highly bullish on the company’s long term prospects and will be adding shares to my position over the coming week.
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