After Earnings, Is Ford Stock a Buy, a Sell, or Fairly Valued?

Ford Motor released its third-quarter earnings report on Oct. 28. Here’s Morningstar’s take on Ford’s earnings and stock.

Key Morningstar Metrics for Ford Motor

• Fair Value Estimate: $19.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: High

What We Thought of Ford Motor’s Q3 Earnings

• The stock remains cheap, with a good dividend that we see as safe. A special dividend announcement in early 2025 would not be surprising, especially given Ford’s massive liquidity. However, the firm needs several consecutive quarters of excellent results with no major cost or warranty problems for its stock price to rise.
• The second and third quarters saw large warranty or cost inflation problems holding the numbers back. Shareholders will unfortunately have to keep waiting for price appreciation while they collect the dividend.
• The quarter was not terrible, but it was disappointing that Ford guided to the low end of its 2024 guidance for total company adjusted EBIT of about $10 billion, down from July guidance of $10 billion-$12 billion. This disappointment has intensified this year, given how well rival General Motors’ GM stock is doing, and how that firm has bought back over $10 billion of its stock in the past 12 months.
• Cost issues explain 2024 guidance being at the low end, along with a supplier issue with highly profitable combustion vehicles. Warranty costs were not the problem, as they were in the second quarter, but they have been higher than planned, as have materials costs at the Turkish joint venture for Transit vans sold in Europe.
• Cash and securities, excluding Ford Credit, remain quite healthy at $27.9 billion, and total automotive liquidity of $46.1 billion should provide plenty of insurance cash for any macroeconomic problems that arise. We understand some investors may be frustrated with Ford not repurchasing its stock, and we would like to see buybacks too, since shares are priced well below our fair value estimate. However, we believe the Ford family and some other shareholders, such as retail investors, want the dividend, so we do not expect buybacks, beyond offsetting dilution for stock-based compensation.

Fair Value Estimate for Ford

With its 5-star rating, we believe Ford’s stock is significantly undervalued compared to our long-term fair value estimate of $19 per share. We think buying Ford’s stock may require investor patience for management to restructure the Ford Blue segment while scaling up the Ford Model e electric vehicle business. Most Model e segment scale may not occur until after the BlueOval City BEV plant in Tennessee produces an EV pickup in 2027, and the segment is expected to lose about $5 billion in 2024, up from a $4.7 billion loss in 2023. Our midcycle total company EBIT margin number is about 6.5% to 7%

Headwinds include rising competition in China, fluctuating commodity costs, foreign exchange pressures worldwide, higher interest rates than a few years ago, and pricing coming down after being inflated by the semiconductor shortage. Our midcycle total company operating margin including equity income and Ford Credit is around 6.8% in 2028. Ford has in the past targeted 10% by 2026, but we model a more conservative number for the midcycle due to increasingly fierce competition, threats of excess capacity, and the risk of macroeconomic downturns negatively affecting profits in a capital-intensive industry. In 2023 this metric was 5.9%, down from 6.6% in 2022.

Read more about Ford Motor’s fair value estimate.

Economic Moat Rating

Ford does not have a moat, and we do not expect that to change. Vehicle manufacturing is a very capital-intensive business, but barriers to entry are not as high as in the past. The industry is already full of strong competition, so it is nearly impossible for one firm to gain a durable advantage. Foreign automakers from China and India may soon enter developed markets such as the United States, and South Korea’s Hyundai and Kia have become formidable competitors, as has Tesla TSLA.

Furthermore, the industry is so cyclical that even the best automakers cannot avoid large declines in return on invested capital and profit during bad times. Cost-cutting helps ease the pain but does not restore all lost profit.

Read more about Ford Motor’s economic moat.

Financial Strength

Year-end 2023 global pension underfunding totaled about $2.3 billion, compared with about $8.2 billion at year-end 2015, while salaried employee retiree healthcare adds another $4.7 billion of shortfall. Nearly all underfunding is from pay-as-you-go plans (mostly from Germany and US senior management plans), which are always unfunded and pay benefits paid from general corporate cash. Management often guides funded plan contributions to be limited to annual service costs. 2024 contributions are guided to about $1 billion, plus about $400 million of benefit payments for unfunded plans. Unfunded plan benefit payments will likely be around $300 million-$400 million annually, in our view.

Comments at analyst days indicate that share repurchases are possible but will probably be done only to offset dilution from stock options. Ford’s dividend is back to its pre-pandemic level and special dividends are possible.

Read more about Ford Motor’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Ford is High. The firm is spending tens of billions across 2022-26 betting consumers will switch to electric vehicles, and so much capital will be wasted if that adoption is too slow or regulations change. Barriers to entry are declining as a growing global market reduces fixed costs as a percentage of sales for new entrants.

The company operates in a very cyclical industry, and there is uncertainty about the timing and magnitude of demand recovery following covid-19. Macroeconomic conditions, rising interest rates, commodity prices, and trade agreement changes in key markets, such as the US, Europe, and China, can quickly derail management’s plans and guidance, while significant disruption is on the horizon as vehicles become more high-tech and autonomous.

Read more about Ford Motor’s risk and uncertainty.

F Bulls Say

• Ford’s turnaround will take lots of time due to many restructuring projects worldwide, but the international business seems to be improving.
• Ford is focusing its investments where it gets the best return, which is why we believe mostly exiting North American car segments and production in South America is the right move.
• Software and data services for fleet customers are a new and lucrative margin stream for Ford compared with just selling the vehicle.

F Bears Say

• The auto industry is very cyclical, and Detroit automakers have sometimes spent years losing significant US market share to foreign automakers.
• Long-term profitability could be hindered by unions, which have recently become more powerful. Major nonunionized import automakers in the US do not have this problem for now.
• Ford’s stock can sell off heavily on macroeconomic fears, even if the company itself is doing well. Furthermore, it takes significant investment to fund growth in the auto industry, which limits potential margin expansion.

This article was compiled by Sokhoeun Noeut.