Based in Dearborn, Michigan, Ford Motor Company (F) is a global leader in the automotive industry and employs approximately 184,000 people worldwide.
Ford designs and manufactures internal combustion engine vehicles and electric vehicles for the passenger and commercial markets, including trucks, utility vehicles, and Lincoln luxury vehicles.
Though shares are up more than 70% in the past year and the dividend yield is slightly above the market average, I don’t think Ford Motor is a Buy given the deteriorating outlook for the auto industry. The planned policy action by the U.S. Federal Reserve to raise interest rates will not help the stock to record higher share prices either.
Thus, I am neutral on this stock.
Ford Motor’s Q3 Earnings
In the third quarter of 2021, Ford Motor’s auto revenue fell nearly 4.5% to $33.2 billion, but that’s enough to top the analysts’ consensus forecast by $440 million.
The U.S. auto giant reported adjusted earnings per share of $0.51 and GAAP earnings per share of $0.45, both beating the median consensus estimate by $0.24.
The Financial Condition
Ford’s available cash on hand and equivalents, including short-term investments, was $31.5 billion at the end of the third quarter, while total debt was nearly $146 billion.
The interest coverage ratio of 1.6 and the current value of 1.2 suggest that the company is only just meeting the interest costs on its outstanding debt while the resources to pay off the short-term obligations are tight. This means that financial stability could be at risk if this situation lasts too long. In fact, an Altman Z-score of 1.0 already indicates financial distress.
Also, as a sign of a weaker balance sheet, the company has not paid dividends until December 1, 2021 (dividends stopped in early 2020). The quarterly dividend was reinstated that day when Ford issued a payment of $0.10 per common share (down 50% from the prior payment). The next quarterly dividend is scheduled for March 1, 2022.
Looking Ahead
Looking ahead to full-year 2021, Ford expects adjusted EBIT to fluctuate in the range of $10.5 billion to $11.5 billion.
Between 2020 and 2025, Ford expects to spend about $40-45 billion in strategic investments.
The Future of the Auto Industry Doesn’t Look Good
Declining vehicle registrations were seen in the U.S. and Europe, but not in China, where the demand for electric vehicles has kept numbers afloat.
Administrations in Western Europe (EU plus EFTA plus UK) registered fewer than 11.8 million cars in 2021 compared to almost 12 million registrations in 2020, a 1.5% year-on-year decrease. The drop is even more than 25% compared to 2019, the year before the pandemic.
In the U.S., vehicle sales fell below 12.5 million units in December, down almost 27% from 16.6 million units sold in January 2021.
The impact of COVID-19 was devastating in 2020, while 2021 showed no signs of recovery. Below are the reasons why:
- Incentives and tax credits failed to sustain the demand for cars during the crisis.
- The global shortage of microchips has caused significant delays in production lines and new vehicle deliveries.
In the People’s Republic of China, auto sales grew nearly 4% from 2020 to about 26.3 million in 2021, thanks to strong demand for New Energy Vehicles (NEVs). About 3.5 million NEVs were sold in 2021, an increase of more than 155% compared to the previous year.
Following China’s example, the European and U.S. auto sectors should also be supported with incentives and tax credits for new energy cars. However, that will require budget allocations over several years, which governments currently cannot afford due to the high debt burden. In addition, massive public intervention is required to set up the charging infrastructure for electric vehicles.
That’s why Ford Motor is trying to capitalize on the growth of the Chinese auto market by opening a new design center in Shanghai. In China, the company sold about 625,000 vehicles in 2021, up nearly 4% year-on-year, with the Lincoln brand posting its best annual sales since it is offered in the Asian market.
However, in China, the government’s financial incentives to buy green vehicles are ending, downgrading the long-term prospects of the domestic industry. Thus, analysts estimate that total vehicle sales in China could reach a lower volume of around 21.5 million units in 2022 and further decline to 20.5 million units by 2023.
Wall Street’s Take
In the past three months, 18 Wall Street analysts have issued a 12-month price target for F stock. The company has a Moderate Buy consensus rating, based on eight Buys, seven Holds, and three Sell ratings.
The average Ford Motor price target is $22.94, implying 15.5% upside potential.
Conclusion
The factors holding European and American markets back appear to remain in place in the years to come as the pandemic hits harder than previously thought. Ford and other EV stocks will then invest more in China, but the long-term prospects for the industry will also cloud over here. The backdrop isn’t favorable for Ford, whose balance sheet isn’t strong. The share price could lose momentum.
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