Ford Analysis – March 2023

Ford motor company (NYSE: F) is in the midst of a transformation. The company is evolving into an electric vehicle leader. Although its EV segment is very slowly taking off, its investments towards a gas-free world will emerge over the next few years. Ford can tap into recently legislated tax credits of up to $7,500 for its F-150 Lightning and Mustang Mach-E. Overtime there will be stricter regulations and requirements for the tax credit. Material-sourcing will gradually be focused on increasing its share that are made in the United States or a country with a free-trade agreement with the US (list here: https://ustr.gov/trade-agreements/free-trade-agreements). But most of Fords workers, plants and supplies are in North America, giving it an advantage against foreign-car makers who don’t have a presence (example: BYD). I believe there will be a restructuring of its business, perhaps a spin-off, of legacy (internal-combustion engine) and electric pickup trucks. To maximize earnings, Ford has to phase out its other car business and focus solely on pickup trucks where margins are relatively higher and market only to high-income countries or regions (North America, Europe, perhaps China down the line) where they could capitalize on their pickup expertise. Ford’s earnings don’t look too great at the moment with negative earnings for 2022. Other metrics that are non-GAAP, like a positive leverage-free cash flow, show that Ford is balancing its cash inflows and outflows whilst paying 4.6% dividend. It would be a good exercise to see why Ford is not performing well on an earnings basis.

From its Annual Report: “The principal factors that influence our earnings are the amount and mix of finance receivables, operating leases, and financing margins. The performance of these receivables and operating leases over time, mainly through the impact of credit losses and variations in the residual value of leased vehicles, also affects our earnings”. The United States and Canada segment covers a large majority of revenue but didn’t do well this past year.

“The United States and Canada segment EBT (earnings before tax) of $2,094 million for full year 2022 was $2,223 million lower than 2021, explained primarily by unfavorable operating lease residual performance, higher borrowing costs, and lower credit loss reserve releases.” Annual results in 2021 were better than 2020 because of favorable operating lease residual performance. What does this term mean? “Residual gain and loss changes are primarily driven by the number of vehicles returned to us and sold, and the difference between the auction value and the depreciated value (which includes both base and accumulated supplemental depreciation) of the vehicles sold.” Interesting stuff but proven difficult to predict. With the optimization of EV pickup truck production and the maintenance of its legacy vehicles (F-150, Bronco), I can see a route to earnings and dividend growth. At a total debt/equity level of 325% and a debt pile of $140 billion looks bad, I would consider looking at its cash holdings ($32.18bn in its most recent quarter), its cash flow, its margin improvement goals (from 6.5% last year to a target rate of between 8% and 10%) and earnings growth projections.

After a 9-month period since the start of interest rate increases, inflation will come back down, hopefully with a soft landing. Until then it is better to be invested in the stock market to avoid eroding your money overtime.

*I own and recommend shares of Ford*

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