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

Ford Motor F released its fourth-quarter earnings report on Feb. 6. Here’s Morningstar’s take on Ford’s earnings and the outlook for its stock.

Key Morningstar Metrics for Ford Motor

• Fair Value Estimate: $19.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High
• Forward Dividend Yield: 4.79%

What We Thought of Ford Motor’s Q4 Earnings

• Given General Motors’ GM very bullish 2024 outlook the week before, we were concerned that Ford’s outlook would disappoint. We don’t believe that ended up being the case, though GM’s outlook still seemed better, given management’s optimism for strong performance.
• Ford’s Model e (its electric vehicle segment) is expected to lose at least $5 billion in 2024, so there’s still lots to do there, and it won’t get better until the BlueOval City complex sees meaningful volume. The plants are supposed to open in 2025, but meaningful volume may not come until 2026.
• There are always reasons to be wary of owning capital-intensive, cyclical names amid macroeconomic uncertainty. Still, we think Ford can have more positive earnings surprises in 2024, especially if the U.S. economy avoids a recession and management keeps finding cost savings.
• We believe it’s reasonable to expect 2024 pricing declines, given inflated new vehicle pricing from the semiconductor chip shortage over the past few years. But it’s also possible that Ford’s emphasis on desirable products—such as the Bronco, Maverick, the new Super Duty, and a refreshed F-150 later this year—could mean pricing won’t fall as much as the firm is budgeting. Ford is also going after more cost cuts, targeting another $2 billion this year by reducing build combinations to reduce the parts and raw materials needed.
• 2024 will be Ford’s second straight year with a supplemental dividend, but at $0.18/share, it’s much less than the $0.65/share offered in early 2023. Before the COVID-19 pandemic, Ford had talked about possibly doing an annual supplemental dividend like truckmaker Paccar PCAR. The company paid some in 2016-18, but mainly at far lesser amounts than in 2023 and 2024. With the pandemic and chip shortage mostly past, perhaps most years going forward will see supplemental dividends, though probably not a year in which a recession seems close.

Fair Value Estimate for Ford Motor

With its 4-star rating, we believe Ford’s stock is undervalued compared with our long-term fair value estimate. We are maintaining our fair value estimate at $19 per share. We think buying Ford’s stock may require investor patience as management restructures the Ford Blue segment while scaling up the Model e business.

Most Model e scale may not occur until after the BlueOval City BEV complex opens in Tennessee in 2025, and management said early this year that the segment is expected to lose at least $5 billion in 2024, up from a $4.7 billion loss in 2023. Our midcycle total company EBIT margin number is about 6.5%-7.0%. Ford introduced a 2026 target of 10% for the metric as part of separating BEV from the Ford Blue combustion business, but the firm has said this is a target rate rather than an exit rate, so we keep our midcycle below 10%. Our midcycle EBIT margin excluding equity income and Ford Credit is about 5%. Automotive operating margin excluding equity income is modeled over 2024-28 to average about 4.5%.

We remain optimistic that in the long term, Ford CEO Jim Farley will be able to cut warranty costs and reduce vehicle design complexity to bring more scale, but the transition will not be fast. Leadership has often said the company needs to be more physically fit, so Ford is in the midst of a multi-billion-dollar restructuring program, mostly for Europe but also for reducing vehicle build combinations and warranty costs globally. We like that Ford has exited or is downsizing unprofitable businesses to focus on light trucks, off-road vehicles such as the Bronco, launching profitable variants of popular vehicles (such as bringing the Raptor trim to Bronco and Ranger), and new segments like compact pickups in the United States with the Maverick. It’s also investing $50 billion in all-electric vehicles for 2022-26.

The commercial vehicle segment, Ford Pro, is doing extremely well, with a 2023 EBIT of $7.2 billion equating to a 12.4% margin, similar to Blue’s $7.5 billion. Pro is asset-light and enjoys a dominant market share with commercial van customers in the U.S. and Europe, and it’s expanding by selling high-margin software services to help business customers.

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. Automakers from China and India may soon enter developed markets such as the U.S., and South Korea’s Hyundai and Kia have become formidable competitors, as has Tesla TSLA. Furthermore, the auto industry is so cyclical that in bad times even the best automakers cannot avoid large declines in return on invested capital and profit. Cost-cutting helps ease the pain but does not restore all lost profit.

Read more about Ford’s economic moat.

Risk and Uncertainty

Our Uncertainty Rating for Ford is High. The firm is spending $50 billion across 2022-26, betting that consumers will switch to electric vehicles. So much capital will be wasted if that adoption is too slow or if regulations change due to not enough consumers switching to EVs. 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 U.S., Europe, and China can quickly derail management’s plans and guidance. Significant disruption is on the horizon as vehicles become more high-tech and autonomous.

Ford’s union relationships have historically been better than GM’s. However, in 2023, UAW President Shawn Fain said Ford and the union are no longer working as a team. We are concerned about a long strike happening in May 2028, as the UAW wants to resume pensions and retiree healthcare for all its workers, which we don’t see as affordable.

Read more about Ford’s risk and uncertainty.

F Bulls Say

• Ford’s turnaround will take a lot of time, due to its many restructuring projects around the world, but so far the international business seems to be getting better.
• Ford is focusing its investments on where it gets the best return, which is why we think that 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 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 Detroit automakers have lost significant U.S. market share to foreign automakers for years at a time.
• Long-term profitability could be hindered by unions, which have recently become more powerful. Major nonunionized import automakers in the U.S. do not currently have this problem.
• 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 Tom Lauricella.