Ford’s stock (NYSE:F) has been on a downward spiral, recently closing below $10 for the first time since January 2021. So far in 2023, the Detroit-based automaker has experienced a 15% decline, and its shares have plummeted by 35% from the peak of above $15 reached in July. This article examines the reasons behind Ford’s stock decline and explores the company’s prospects.
Reasons Behind Ford’s Stock Decline
Ford’s Q3 earnings report, released last week, revealed a series of concerns. The company not only missed consensus earnings estimates but also withdrew its profit guidance for 2023, which it had previously raised during the preceding earnings call.
Additionally, Ford expressed a tepid outlook on the demand for electric vehicles (EVs) and delayed a planned $12 billion investment in EV production capacity. Similarly, General Motors (GM) reduced its EV production forecasts and terminated a joint venture with Honda Motors (HMC) focused on small EV development.
Beyond earnings, there are other factors contributing to the pressure on Ford’s and GM’s shares. The recent United Auto Workers (UAW) contract negotiations, while favorable for the unions, are expected to increase Ford’s per-vehicle costs by an estimated $850 to $900. Ford also mentioned “quality” and “cost” issues, citing substantial warranty-related expenses in the third quarter. Furthermore, unfavorable macroeconomic conditions, including rising interest rates, recessionary fears, and geopolitical tensions, are dissuading both consumers and investors from cyclical industries like automaking.
Is Ford Stock a Good Value Buy Now?
Despite the recent challenges, there are several factors to consider before purchasing Ford stock below $10 per share:
Resilient Legacy Business: Ford’s legacy business, encompassing its internal combustion engine (ICE) business, Ford Blue, and commercial business, has remained strong. In the third quarter, it generated pre-tax profits of approximately $1.7 billion for each segment. This performance aids in offsetting the losses anticipated in the EV business, expected to reach $4.5 billion in 2023.
Production Flexibility: While Ford has scaled back its ambitious EV production plans, it retains the advantage of flexibility between ICEs, hybrids, and EVs. Given the challenges in the EV market and price competition, this flexibility allows Ford to optimize profitability by shifting its focus away from lower-margin products.
Ford+ Transformation Plan: Ford’s ongoing transformation under the Ford+ plan aims to achieve “growth and value creation.” The plan focuses on structural margin improvements.
Strong Product Portfolio: Ford boasts a robust product portfolio, including the popular F-150 pickup. The ICE version of the F-150 has been the best-selling pickup in America for almost 50 years, and its electric version has shown promise, especially in comparison to Tesla’s ongoing struggles with its Cybertruck production.
Attractive Dividend Yield: Ford offers an attractive forward dividend yield of over 6%, significantly exceeding the S&P 500 Index’s dividend yield and surpassing that of major listed automakers.
Key Risks for Ford Investors
Despite these positive aspects, there are key risks that Ford investors should monitor:
Industry Upheaval: The global automotive industry is experiencing substantial upheaval, driven in part by Tesla’s aggressive pricing strategy. This situation could worsen before showing signs of improvement.
Economic Downturn: Even Ford’s ICE business may suffer if the U.S. economy deteriorates further, as car sales typically decline during recessions.
Competing with Tesla: Competing effectively with Tesla remains a significant challenge. Ford’s leadership must address cost and quality issues, which were emphasized during the Q3 earnings call.
In conclusion, despite ongoing headwinds in the automotive industry, Ford’s brand strength and diverse product portfolio position it to weather the current turmoil. While there may still be room for further stock price declines, Ford’s relatively low market capitalization and trading below book value make it a reasonable risk-reward proposition for investors.
Featured Image: Unsplash @ Kenny Eliason
