Supply chain issues have made investments in traditional and electric car brands unpopular recently, but Ford’s neglect (NYSE: F) at this point his electric vehicle transformation would be a huge mistake. Car company is growing aggressively increasing production of electric vehicles and the launch of the F-150 Lightning pickup truck were significant events for Ford.
Ford stock remains heavily undervalued and I believe the drop was exaggerated considering the company has just reaffirmed its free cash flow guidance for FY 2022.
Despite the loss in Q1’22, Ford’s revenue remains solid
Ford’s first-quarter revenue fell 5% year-on-year to $34.5 billion due to lower wholesale volumes and currency barriers. However, Ford’s Q1’22 revenue was still better than analyst predictions of $31.2 billion.
Ford lost $3.1 billion in Q1’22, primarily due to an unrealized loss related to one of its electric vehicle investments. The auto brand’s adjusted EBIT was $2.3 billion, representing a 41% year-over-year decline. The negative cost effect was partially offset by strong prices for Ford products.
Rivian price correction causing significant mark-to-market losses for Ford
Ford is an investor in electric vehicle start-up Rivian Automotive (RIVN), which saw its share price drop 50% in the first quarter. Ford owns a 12 percent stake in the electric vehicle company and has not sold its investment after the company’s IPO last year. Ford’s investment in Rivian was worth $10.6 billion at the end of FY 2021 and $5.1 billion at the end of Q1’22. Rivian shares have fallen an additional 37% from the end of the first quarter to May 2, 2022.
Rivian’s decline in market valuation resulted in a $5.4 billion mark-to-market loss in the first quarter.
Guide for FY 2022
The good news for Ford shareholders last week was that the auto brand reaffirmed its guidance for FY 2022. Ford continues to expect adjusted EBIT from $11.5 billion to $12.5 billion meaning the company anticipates up to $3.4 billion in adjusted EBIT contributions. in the next three quarters. . Also important: Ford also maintains a free cash flow guide for FY 2022 that calls for FCF between $5.5 billion and $6.5 billion despite supply chain problems and higher commodity costs. As Ford reaffirms its FCF guidance, the decline in Q1’22 free cash flow is far less pleasant than it should be.
Ford generated free cash flow of $(0.6)B in Q1’22 due to negative time and working capital differences. Ford’s guidance for FY 2022 implies that Ford will see a significant increase in FCF in the second half of the year.
Cheap free cash flow valuation
Ford is cheap and the company is just about to start shipping its new F-150 Lightning pickup truck, Ford’s flagship electric vehicle that has already received more than 200,000 orders. The main reason to buy Ford at this point is the discounted valuation and the company’s huge potential to become the leading EV company of the decade. Based on free cash flow of $5.5 billion to $6.5 billion, Ford’s stock is valued at 8.9-10.4 X.
Risk with Ford
The biggest risk for Ford is the supply chain crisis, which arguably hasn’t abated yet. Supply chain issues could potentially delay Ford’s new electric vehicle launch and slow the increase in EV sales. Ford already had to shut down factories this year due to a shortage of semiconductor chips, which led to lost production volumes and weaker free cash flow. Rising commodity costs are also a risk for Ford and the stock as it has a material impact on free cash flow. Ford’s guidance for FY 2022 is based on the assumption that commodity costs will increase by $4.0 billion year over year. If spending increases beyond that, Ford’s guidance may be affected.
I like Ford primarily because of its growing lineup and EV product ratings. What will change my mind about Ford is if the supply chain situation worsens and the company cuts its guidance for FY 2022 free cash flow.
Enough is enough. Ford’s stock shouldn’t have nearly halved of late, given the company recently reaffirmed guidance for FY 2022 that helps shareholders maintain confidence in Ford’s free cash flow potential. The launch of the new F-150 Lightning is set to further drive Ford’s electric vehicle sales and provide additional momentum for the growing EV business. Considering how much the stock has dropped and how cheap Ford’s free cash flow is, Ford’s stock continues to have a very favorable risk profile.