Ford Earnings: Excellent Pro Segment Profit but Also Continued Cost Headwinds

Key Morningstar Metrics for Ford Motor

• Fair Value Estimate: $20.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Ford Motor Earnings

Ford’s F third-quarter results only had about a $100 million EBIT hit from the United Auto Workers strike but had higher year-over-year losses in the Model e electric vehicle segment. A disappointing $1.2 billion warranty headwind plus other cost increases led to an adjusted diluted EPS of $0.39, missing the Refinitiv consensus of $0.45, sending the stock down 4% in Oct. 26 after-hours trading.

We are not changing our fair value estimate, but as discussed in our Oct. 26 note on the tentative UAW agreement, once the contract is ratified and Ford briefs investors, we may reduce our fair value by at least $1-$3 per share. CFO John Lawler on the earnings call said the strike so far has cost Ford about $1.3 billion in EBIT, so we are reducing our 2023 EPS by about 15% to factor in that amount and for some additional costs such as a likely ratification bonus when UAW members eventually approve a deal. Ford also withdrew its 2023 guidance because of the uncertainty around the strike but said it had been on track to meet its projected adjusted EBIT of between $11 billion and $12 billion.

Model e’s loss increased to $1.3 billion from a $612 million loss in the prior year’s quarter and a $1.1 billion loss in the second quarter. A $500 million unfavorable cost variance plus $200 million unfavorable pricing as Tesla TSLA and other EV rivals keep on discounting drove the higher loss, and we don’t expect much improvement until Ford’s Gen 2 EVs come to market around 2025. For now, the company is delaying $12 billion in EV spending, including two planned battery plants and the slowing of EV production.

Ford Blue (combustion) and Ford Pro (commercial customers) both grew earnings year over year, with Pro’s profit more than quadrupling to nearly $1.7 billion. Ford’s dominance in commercial vehicles continues, while it is also enjoying rapid growth in software subscriptions, which helped Pro’s pricing contribute $1.9 billion in incremental profit. Blue’s earnings rose 17.2% on a $400 million pricing tailwind.

We expect pricing to eventually be a negative year-over-year contributor, but we think there’s at least a couple more quarters before that happens. We expect it to be a headwind sometime in 2024. We stress that it’s important to not look at pricing declines in isolation, as we think some observers are, and instead remember that higher volumes can offset at least some of the inevitable pricing decline to come as new vehicle inventory keeps normalizing following the chip shortage. Ford’s balance sheet remains flush with liquidity to help fund the transition to electrified vehicles and software services, as well as provide a buffer for whenever the next recession comes. Automotive cash and securities of $29.1 billion plus available credit lines brought total Sept. 30 liquidity to $50.6 billion, and automotive net cash was a comfortable $9.3 billion. This ample funding gives Ford time to reinvent itself, and more time is needed for cost control.