After Earnings, Is Ford Stock a Buy, a Sell, or Fairly Valued?

Ford F released its first-quarter earnings report on April 24. Here’s Morningstar’s take on Ford’s earnings and the outlook for its stock.

Key Morningstar Metrics for Ford

• Fair Value Estimate: $19.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Ford’s Q1 Earnings

• We thought Ford had a good quarter, mostly due to the Pro commercial vehicle segment, which is asset-light, in that it does not have manufacturing plants allocated to it. Ford seems to be a “show me” stock, so market expectations are lukewarm. It was thus good to see an optimistic operating earnings outlook—a $500 million increase on the low and high end of free cash flow guidance—and the firm beating LSEG consensus for adjusted earnings per share of $0.42 by 7 cents. One could criticize Ford for only saying it’s tracking to the high end of its operating earnings guidance while GM raised its operating earnings, but we still think the firm had a good quarter.
• Total company adjusted operating earnings fell 18.2%, with unfavorable variances of about $1.7 billion in the Ford Blue combustion segment and $600 million in the Model e electric vehicle segment to blame. Model e lost $1.3 billion (nearly double the prior year’s quarter) on pricing headwinds, but segment costs were flat. Blue suffered a $1.7 billion volume and mix headwind, but pricing was a favorable $300 million and it made $905 million.
• The star was again the Ford Pro commercial vehicle segment, which is asset-light and had a $2.5 billion tailwind from volume, mix, and pricing offsetting $1.1 billion higher investment costs. Segment operating earnings more than doubled to $3 billion from $1.3 billion on a margin of 16.7%, up 640 basis points. Pro’s revenue rose 36% to $18 billion on the new Super Duty and Transit van sales, along with more software and service growth. Pro now has 13% of its operating earnings from software and physical services, and targets at least 20% in a few years. Software subscriptions grew 43%.
• Ford raised its free cash flow guidance to a midpoint of $7 billion from $6.5 billion on lower capital expenditure as it delays electric vehicle capacity increases. Management kept full-year total company adjusted operating earnings guidance of $10 billion-$12 billion, but it said results are tracking to the higher end of that range. This is a considerable improvement from 2023′s $10.4 billion, but still down slightly excluding the $1.7 billion impact of the United Auto Workers strike. Segment level guidance is unchanged, and Ford still expects to lower costs by $2 billion on lower spending in freight, materials, and engineering.
• We’d welcome a share repurchase but do not expect one, as management and key shareholders prefer a dividend. Automotive cash and securities finished the quarter at $25.1 billion, and total auto liquidity is $42.6 billion, so there is plenty of ammunition for further investment and returning cash to shareholders while maintaining a buffer for bad events.

Fair Value Estimate for Ford Stock

With its 4-star rating, we believe Ford’s stock is undervalued compared with our long-term fair value estimate of $19 per share. We think buying Ford’s stock may require investor patience for management to restructure the Ford Blue segment while scaling up the Ford Model e business. Most Model e segment scale may not occur until after the BlueOval City BEV plant in Tennessee opens in 2025, and management said in early 2024 that the segment is expected to lose at least $5 billion in 2024, up from a $4.7 billion loss in 2023.

We remain optimistic about CEO Jim Farley cutting warranty costs and reducing vehicle design complexity to bring more scale in the longer term, but the transition will not be fast. Leadership has often said the company needs to be more physically fit, so Ford is amid a multi-billion-dollar restructuring program—mostly for Europe, but also for reducing vehicle build combinations and warranty costs worldwide.

Read more about Ford’s fair value estimate.

Economic Moat Rating

Ford does not have a moat, and we do not expect that to change. Vehicle manufacturing is a very capital-intensive business, but barriers to entry are not as high as in the past. The industry is already full of strong competition, so it is nearly impossible for one firm to gain a durable advantage over another. Foreign automakers from China and India may soon enter developed markets such as the United States, and South Korea’s Hyundai and Kia have become formidable competitors, along with Tesla TSLA. Furthermore, the auto industry is so cyclical that even the best automakers cannot avoid large declines in return on invested capital and profit in bad times. Cost-cutting helps ease the pain but does not restore all lost profit.

Read more about Ford’s economic moat.

Financial Strength

Year-end 2023 global pension underfunding totaled about $2.3 billion, compared with about $8.2 billion at year-end 2015, while salaried employee retiree healthcare adds another $4.7 billion of shortfall. Nearly all underfunding is from pay-as-you-go plans (mostly from Germany and US senior management plans), which are always unfunded and pay benefits paid from general corporate cash. Management often guides funded plan contributions to be limited to annual service costs. 2024 contributions are guided to about $1 billion, plus about $400 million of benefit payments for unfunded plans. Unfunded plan benefit payments will likely be around $300 million-$400 million annually, in our view.

Comments at analyst days indicate that share repurchases are possible but will probably be done only to offset dilution from stock options. Ford’s dividend is back to its pre-pandemic level, and special dividends are possible (they have been done in 2023 and 2024).

Read more about Ford’s financial strength.

Risk and Uncertainty

Our Morningstar Uncertainty Rating for Ford is High. The firm is spending $50 billion across 2022-26 betting consumers will switch to electric vehicles, and so much capital will be wasted if that adoption is too slow or regulations change. Barriers to entry are declining as a growing global market reduces fixed costs as a percentage of sales for new entrants.

The company operates in a very cyclical industry, and there is uncertainty about the timing and magnitude of demand recovery following covid-19. Macroeconomic conditions, rising interest rates, commodity prices, and trade agreement changes in key markets, such as the US, Europe, and China, can quickly derail management’s plans and guidance, while significant disruption is on the horizon as vehicles become more high-tech and autonomous.

We are concerned about a very long strike occurring in May 2028 because the UAW wants to resume pensions and retiree healthcare for all its workers, which we don’t see as affordable.

One of the largest environmental, social, and governance risks we see with Ford is increasing regulatory scrutiny on combustion vehicles. However, we think management is planning for the change, and electric vehicles like the Mach-E and F-150 Lightning show the company is serious about switching away from combustion.

Read more about Ford’s risk and uncertainty.

F Bulls Say

• Ford’s turnaround will take lots of time due to many restructuring projects worldwide, but the international business seems to be improving.
• Ford is focusing its investments where it gets the best return, which is why we believe mostly exiting North American car segments and production in South America is the right move.
• Ford has tried to remove some administrative layers, and we like CEO Jim Farley’s aggressive moves into electric vehicles, which the company was slow to do in the past.

F Bears Say

• The auto industry is very cyclical, and at times Detroit automakers have lost significant US market share to foreign automakers for years.
• Long-term profitability could be hindered by unions, which have recently become more powerful. Major nonunionized import automakers in the US do not have this problem for now.
• Ford’s stock can sell off heavily on macroeconomic fears, even if the company itself is doing well. Furthermore, it takes significant investment to fund growth in the auto industry, which limits potential margin expansion.

This article was compiled by Liz Angeles.