Ford: Charming Earnings in Q2, Massive Dividend Rise, Buy

Bill Pugliano News/Getty Images

Thesis Articles

wade (NYSE:F) reported much stronger-than-expected quarterly results. Guidance for the year is also sound, despite the drag from inflation and a potential slowdown in the economy. Because Ford has backed off quite a lot from the highs reached in early 2022, the company did not trade at expensive valuations at all. Ford’s EV business continues to grow, and the company has increased its shareholder returns through a hefty 50% dividend increase. Overall, Ford does look like a solid EV and revenue is at play here.

Ford Is Much Better Than Expected

During the second quarter, Ford saw its revenue increase 57% year over year, easily beating estimates. This was made possible in part by easy comparisons with a weak quarter a year earlier when lockdowns and other COVID measures and supply chain issues had a big impact. Not all of those problems disappeared, but they became less impactful over time, allowing Ford to increase its revenue at a great rate. In fact, Ford even outperformed Tesla (TSLA), the “king of growth” in the auto space, as Tesla only increased its revenue by 42% over the same timeframe — which of course is still pretty good for an auto company.

In terms of profitability, the company is also doing very well. Adjusted earnings per share came in at $0.68, or a little over $2.70 per year — relative to a stock price of $15, that’s a pretty high level of profitability. Earnings did, like earnings, beat estimates easily, as EPS was up to 50% higher than forecast. Analysts were clearly horribly wrong with their assumptions, likely because they underestimated Ford’s pricing power and ability to push higher input costs onto customers.

Many commodities have risen in price over the past year, including those important to the automotive industry, such as steel, aluminum, copper, lithium, nickel, and so on — the last three commodities are particularly important for electric vehicles. Higher raw material costs put pressure on profit margins, as long as manufacturers don’t increase the prices they ask for their vehicles. Fortunately, Ford was able to push prices up without hurting its sales momentum. Ford’s unit sales during the quarter were up 35% year-on-year, which is interesting. But thanks to an average sales price increase of ~16%, Ford was able to increase its revenue well over 50% in the same period. This increase in the price per vehicle for mid-teens allowed Ford to more than offset the drag from higher commodity prices. This can be seen from the company’s gross margin which increased by 650 base points. Without the price increase, Ford’s gross margin would fall by a few hundred basis points, which would result in a net loss for the quarter. But thanks to the company’s ability to generate significantly higher revenue per each vehicle it sold, Ford’s profitability increased considerably.

Of course, price increases can be a double-edged sword. When customers are unwilling to pay more, price increases can lead to lower sales figures, as customers switch to other brands at lower prices or avoid buying altogether. But that’s not the case here. Ford did see its sales figures increase, as shown above. More importantly, the company gained market share during the period, as its global share rose from 4.9% in the last year’s quarter to 5.3% in Q2 2022. As such, Ford’s price increase did not result in customers looking elsewhere — on the contrary. , customers are even more willing to buy Ford, despite the price increase. That’s a very positive and important data point, as it shows that Ford’s model lineup is attractive compared to what its peers are selling and the brand is strong enough to make customers care less about vehicle prices.

During the pandemic, fiscal and monetary stimulus resulted in high consumer purchasing power. This has changed in the more recent past, as high inflation and rising interest rates have hurt consumer sentiment and

US Consumer Sentiment Index and real US disposable personal income
US Consumer Sentiment Index Data by YCharts

In the chart above, we see the US consumer sentiment index and total spendable income (in real terms) in the US. Both have declined over the past year and a half. The fact that Ford has had no problem with rising prices is somewhat surprising — the average consumer is hurt, but Ford customers are more than willing to pay to buy a new Ford. That is a good position, but investors should keep an eye on this trend, as there is no guarantee that this will continue. At least it’s likely that Ford will have a harder time pushing prices up further, especially if consumer sentiment continues to deteriorate.

However, Ford’s guidance for the second half of the year is so solid that management seems to anticipate that weak consumer will not be a major concern in the near term — at least not for Ford, others may feel the greater impact. The company is aiming for EBIT of $11.5 billion to $12.5 billion this year, or $12 billion at the midpoint. Since Ford had generated $6.0 billion EBIT in H1, the company thus assumed that H2 would be equally successful. The economic recession/downturn thus has no significant impact on Ford, at least according to their base case assumptions. Since the auto industry is generally sensitive in terms of economic strength, Ford’s assumption that the H2 will be as strong as the H1 can be seen as a sign of confidence or strength.

Prospects are Positive

Ford had a strong Q2 and the second half of the year should also be very solid. More importantly, Ford has a positive long-term view, for three reasons.

Ford’s growing investment in electric vehicles is paying off. With its F-150 Lighting, Ford was one of the first players to enter the electric truck space in a meaningful way. Rivian (RIVN), in which Ford has a stake, is also active in this area, but Tesla has not been able to launch the applicable Cybertruck yet. Since Ford already has a strong position in the ICE-powered truck space, it is a natural contender for the electric truck crown. Customers seem to agree, as the Ford F-150 Lightning has been a huge success so far.

The following slide shows Ford’s success in increasing its EV business:

Ford Outlook

Ford Presentation

With an estimated 90% annual growth rate, Ford believes that its EV business will grow at nearly twice the rate of Tesla’s EV business (long-term forecast of 50%). Ford will grow from a smaller base, which makes relatively high growth rates easier, but if Ford manages to achieve that goal, it will be a huge success. Strong growth requires a large number of batteries and battery materials and other EV-related commodities. Ford has done a good job securing the supply chain for its ambitious growth plans, as the 2023 exit run rate could hit the 600,000 level, while the company plans to be able to produce 2 million EVs by the end of 2026. Whether Ford will actually do so is unknown, but it is clear that Ford is well on its way to boosting its EV business at a rapid pace. Customers like Ford products, such as the Ford Mustang Mach-E, F-150 Lightning, and the professional-oriented Ford Transit EV are all in high demand. I believe that Ford will continue to perform well in the EV field, and could eventually turn out to be one of the biggest players in this field.

Ford also looks solid based on two other factors. The dividend has recently increased by 50%, which has lifted its payout back to pre-pandemic levels. At current prices, it yields an attractive 4% dividend yield, meaning that investors will receive a very meaningful income stream when holding Ford. Ford could also benefit from some expansion over the next few years, as its valuation is relatively low. Based on its current free cash flow guidance of $6 billion by 2022, Ford is trading at just 10x free cash flow, and only 5x EBITDA. If we go into a great recession, stocks certainly have downside potential. But if it can be avoided, and if Ford continues to execute well, the stock could rise based on today’s undemanding valuation.

Take away

Ford had a much more successful Q2 than expected, and the outlook for the second half of the year is also very healthy. Despite higher raw material prices and weaker consumers, Ford’s products were in demand and the company was able to demand premium prices, which benefited its margins.

Ford is performing well in the EV space, has an attractive product line in the market and continues to add new electric models, and with a 4% dividend yield and a light rating, Ford can be a solid long-term choice for those looking for a combined income. and EV exposure.

Leave a Comment