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Ford Stock (NYSE:F) saw another decline in December, dropping 17% in a relatively short period due to growing economic concerns and persistent inflation. Whereas Ford is already seeing material headwinds regarding raw material costs for FY 2022 and inflation remains elevated heading into FY 2023, I believe Ford’s valuation will remain under pressure and investors will be able to buy Ford at a lower price next year!
A Positive Catalyst: Electric Vehicle Growth Set to Accelerate
Ford announced strong growth in its electric vehicle segment in November. During the month of November, Ford sold 6,255 electric vehicles, posting an impressive annual growth rate of 102.6%. Ford’s electric vehicle sales are growing twice as fast as the entire electric vehicle market segment, according to Ford’s sales breakdown.
One model that has remained particularly popular with US buyers is the Mustang Mach-E sport utility vehicle, of which Ford sold 3,539 units, posting a 14.6% year-over-year increase. Ford is also starting to increase sales of the F-150 Lightning electric pickup truck – which began selling this year – which the car brand sold 2,062 in November, up from zero sales the year before. In October, Ford sold 2,436 F-150 Lightning trucks. Ford said it will aggressively ramp up production of the F-150 Lightning over the next few years, which means the company could see a sales volume of 65-70,000 (my estimate). Electric vehicle growth is likely to remain strong through fiscal 2023 as adoption increases and Ford strives to improve its electric product lineup.
Source: Ford
Increase in free cash flow forecast
Ford recently increased its free cash flow guidance for fiscal 2022 and expects to generate $9.5 billion to $10.0 billion in free cash flow, reflecting an increase from previous guidance. from Ford from $5.5 billion to $6.5 billion in free cash flow. However, Ford did not increase its EBIT guidance for fiscal year 2022.
The free cash flow forecast was increased due to strong pricing power as well as strong adoption of electric vehicle products such as the F-150 Lightning, Mustang Mach-E sport utility vehicle and the e-Transit… most of which are new models that have only recently been launched.
Expect margin pressure to build in fiscal 2023
Ford’s third quarter saw wholesale volumes increase 7% year-over-year due to easing supply chain constraints and an enhanced electric vehicle lineup. However, costs are also rising and Ford’s adjusted EBIT was down $1.2 billion year-over-year to $1.8 billion due to inflationary headwinds and higher fuel prices. raw materials. As a result of these cost headwinds, Ford’s adjusted EBIT margin declined 3.8 PP year-over-year to 4.6% and 4.7 PP quarter-over-quarter . Ford has guided up to $9 billion in higher costs in fiscal 2022 due to higher raw material prices and inflation, so margins are likely to come under additional pressure, particularly if a deeper global recession was expected to weigh on wholesale volumes and costs in fiscal year 2023. .
Source: Ford
Ford valuation and performance
After a 44% drop in prices this year (I warned of the potential Ford correction in November), Ford shares are currently valued at a forward P/E ratio of 6.6X and a P/FCF ratio of 4.8X. Although Ford’s valuation is low based on both earnings and free cash flow, economic risks have increased significantly and the US economy may be forced to cope. to a recession in 2023. In addition, inflation remains high – it was 7.1% in November – and poses a significant problem. challenge for Ford and other automotive brands facing higher supplier costs.
Risks with Ford
Ford, I believe, is going to see a major change in operating conditions in fiscal year 2023 due to mounting economic pressure – with a recession becoming more likely – which could lead to higher supplier costs as well only pressure on the margins. Lower wholesale volumes, slower product demand in a high-inflation world and weakened pricing power are also potential risk factors for Ford’s valuation. Due to these risk factors, particularly inflationary headwinds, I also believe that Ford is going to see a year-over-year decline in free cash flow in fiscal year 2023.
Final Thoughts
Ford shares fell on another down leg in December and lost about 17% of their value. Although stocks are clearly cheap, Ford faces cyclical earnings risks as economic risks rise and inflation remains a major headwind in fiscal 2023. Although Ford has raised its cash flow forecast free cash flow and the valuation is also generally attractive from an earnings/free cash flow perspective, changes in operating conditions are a strong indication that Ford has reduced earnings potential for fiscal 2023!