There has been a notable divergence in the price action of auto stocks in 2023. While pure-play electric vehicle (EV) names have done quite well, with Tesla (TSLA) more than doubling year-to-date, legacy automakers like Ford (F) and General Motors (GM) have been less impressive. GM is underperforming the S&P 500 ($SPX) in 2023, and Ford's year-to-date performance is right in line with the S&P.
However, not only did Ford and General Motors post better-than-expected Q2 earnings, both automakers raised their respective 2023 guidance, as well. Still, the results didn't impress investors, and both stocks fell after earnings. Following the pullback, I believe that Ford stock looks like a buy at these levels, as it looks attractively priced after the recent underperformance.
Ford Reported Better-Than-Expected Q2 Earnings
Ford’s Q2 revenues rose 12% YoY to $45 billion, and automotive revenues came in at $42.43 billion - which was ahead of the $40.38 billion that analysts expected, with net income almost tripling to $1.92 billion.
Here are some of the other takeaways from the auto giant's earnings – starting with the good parts:
- Ford Blue, which is the company’s legacy internal combustion engine (ICE) business, reported earnings before interest and taxes (EBIT) of $2.3 billion.
- Ford Pro, the company’s commercial business, reported EBIT of $2.4 billion, over twice what it reported in the corresponding quarter last year.
- The automaker raised its full-year adjusted EBIT guidance range from $9 billion-$11 billion to $11 billion-$12 billion, while simultaneously raising its adjusted free cash flow guidance from $6 billion to $6.5 billion-$7 billion.
Ford Spooked Markets with Its Commentary on EV Business
However, several aspects of Ford’s earnings and guidance spooked investors. For instance, its EV business - newly rechristened as Model e - reported a pre-tax loss of $1.08 billion. The company now expects the business to lose $4.5 billion in 2023, which is 50% higher than the previous guidance.
Ford also addressed the slow pace of EV adoption, and scaled back its aggressive EV production plans. The company now expects to hit an annual production capacity of 600,000 vehicles by 2024 instead of 2023 – while being “flexible” about the goal of 2 million vehicles it previously forecast by 2026. Among other factors, Ford also blamed the EV price war, which is denting the profitability of industry players.
The company, however, reaffirmed its goal of hitting an 8% EBIT target by 2026, with CEO Jim Farley stressing, “Our strategy is to make 8% margin irregardless of the price point, and we're going to allocate capital along those lines.”
As for Ford's hybrid portfolio, Farley said the company would add hybrid versions across its ICE models, with the aim of quadrupling sales over the next five years.
Ford Stock Forecast: Wall Street Analysts Have a Mixed Opinion
After Ford’s Q2 earnings release, Morgan Stanley reiterated its overweight rating on the stock, as the brokerage was impressed with the strong performance of the legacy ICE business.
However, Jefferies – which had previously upgraded the stock to a buy in May after the company's impressive investor event – downgraded its rating to sell after Q2 earnings, citing the widening EV losses. “We continue to run a slow-motion-soft-landing scenario with price normalization helping volume and cost inflation easing, aware of well-flagged risks from union negotiations,” said Jefferies analysts in a note accompanying the downgrade.
Overall, analysts rate Ford’s stock as a Hold. Of the 14 analysts covering the stock, 4 rate it as a Strong Buy, while 2 call it a Moderate Buy. Five analysts rate it as a Hold, while the remaining 3 rate it as a Strong Sell. Ford’s mean target price of $14.92 is 16.6% above current prices, while the Street-high target price of $23 is a premium of over 79%.
That said, while Ford’s stock price has fallen since the Q2 earnings release, I find it a good buy at these levels for the following reasons:
- First, Ford is quite transparent with its business, and provides a breakdown of its EV business - including the widening losses - which helps in better gauging the performance of the different business segments. While other legacy automakers are also losing money in their EV businesses, not all are transparent enough to reveal the numbers.
- Second, Ford’s legacy business is posting healthy profits and cash flows, even as there are concerns over it reaching peak profitability.
- Third, Ford’s focus on profitability sounds reassuring at a time when there is a massive price war in the industry, with players like Tesla prioritizing delivery growth over margins.
- From a valuation perspective, Ford also looks attractive, with a forward price-to-earnings multiple of a mere 6.41x, and a healthy dividend yield of 4.64%.
Ford has a strong product portfolio – including the F-150 pickup, whose ICE version has been America’s best-selling pickup for 46 consecutive years. Overall, I believe that markets are getting a bit too bearish on Ford’s EV business, even as most pure-play EV stocks have skyrocketed in 2023, making F stock a contrarian stock to buy.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
