Should a decline in Ford’s stock be considered a buying opportunity?

Following the release of the Q2 2024 report on 24 July, Ford Motor Co. (NYSE: F) shares declined by 18%. The decline continued the next day. The company’s financial performance disappointed investors as it failed to meet expectations, especially in light of a more robust report from the competitor, General Motors Company (NYSE: GM), published the day before. This article will examine Ford’s report, analyse the factors that negatively affected its profit, and assess the potential for future revenue growth.

Ford Motor Co.’s main business segments

Ford divides its operations into several key divisions and publishes financial results for each (except Ford Next, which does not yet generate income). Below are the main Ford divisions and business areas:

• Ford Blue – traditional production of internal combustion engine vehicles and hybrid vehicles. This represents the core of Ford’s business and includes the production and sale of classic car models such as the Ford F-150, Ford Explorer, and Mustang
• Ford Pro – the production of commercial vehicles and provision of related services. The division works with clients who use vehicles for business
• Ford E – the development and sale of electric vehicles and innovative technologies. The department is in charge of models such as Ford Mustang Mach-E and F-150 Lightning and the development and promotion of new electric vehicle platforms
• Ford Credit – granting loan facilities to retail vehicle buyers and official company dealers. The division’s operations include leasing, vehicle financing, and dealer financing for inventory replenishment
• Ford Next – developing new business models and innovative solutions beyond traditional automobile production. This unit is responsible for research and development of self-driving technologies, new mobility formats, and other promising projects that may lay the foundation for the company’s further growth

Ford Motor Co.’s Q2 2024 report

Ford released the Q2 2024 financial results on 4 July. Below are the report’s financial indicators:

• Revenue – 47.8 billion USD (+6%)
• Net income – 1.8 billion USD (-6%)
• Earning per share – 0.47 USD (-35%)
• Ford Blue revenue – 26.7 billion USD (+7%)

EBIT – 1.2 billion USD (-48%)
EBIT Margin – 4.4% (-480 basis points)

• Ford Pro revenue – 17.0 billion USD (+9%)

EBIT – 2.6 billion USD (+8%)
EBIT Margin – 15.1% (-20 basis points)

• Ford E revenue – 1.1 billion USD (-37%)

EBIT – -1.1 billion USD

• Ford Credit revenue – 3.0 billion USD (+20%)
• Total vehicle sales – 536,050 pcs (+0.8%)

Electric vehicles – 23,957 pcs (+61%)
Hybrids – 53,822 pcs (+55%)
ICE – 458,271 pcs (-0.5%)

The report shows that revenue growth was primarily driven by the Ford Pro division, which saw a 9% increase and had the highest margin compared to other divisions. Ford ranked second in US electric vehicle sales behind Tesla (NASDAQ: TSLA), outperforming GM with 21,930 vehicles sold. However, unlike Tesla, Ford’s electric vehicles are not yet profitable, as reflected by the Ford E division’s loss of 1.1 billion USD. Consequently, Ford’s management decided to cut production of the F-150 Lightning pickup truck and postpone 12.0 billion USD in EV development investments. Instead, the company is betting on compact electric vehicles with higher margins. In this segment, Ford plans to compete with Tesla and the Chinese company BYD, which sells low-cost electric cars.

Ford Motor Co.’s forecast for 2024

Given the current market challenges and the company’s internal issues, Ford’s management has made a somewhat cautious forecast for the 2024 results. In particular, profits are expected to decrease due to losses in the Ford E division, which may reach 5.0-5.5 billion USD. However, the traditional business segments (Ford Blue and Ford Pro) are projected to grow steadily, which should partially offset these losses.

EBIT expectations remain conservative, ranging between 10.0 and 12.0 billion USD. The adjusted free cash flow outlook was raised by 1.0 billion USD to 7.5-8.5 billion. The target range for capital expenditures remains unchanged at 8.0-9.0 billion USD.

Ford Blue’s revenue is expected to improve significantly in the second half of the year due to the increased output of the F-150, Explorer, and Ranger models.

Investor reaction to Ford Motor Co.’s report

Ford’s Q2 2024 revenue increased, with the electric vehicle segment also seeing brisk growth. The only exception was internal combustion engine car sales, which did not progress. Nevertheless, the stock price fell by 13% following the report’s release and continued to decline.

There are two reasons for such investor behaviour.

First, there was a decrease in earnings per share (EPS). Experts expected a value of 0.68 USD, but the actual result was 31% lower, marking a 35% decrease from last year’s corresponding period. The company attributes this to a significant rise in warranty costs, which grew by 800 million USD from the previous quarter. Such an increase points to serious vehicle quality issues. An example of such difficulties is Boeing (NYSE: BA), which has not rebounded from aircraft quality scandals for five years. For Ford, the decline in quality can be even more critical as competition in the car market is much more intense than among aircraft manufacturers.

The second reason for Ford’s stock decline was the General Motors Company report, which was published the day before Ford’s report. GM reported a 60% surge in earnings to 3.06 USD per share, beating experts’ forecasts, and raised the annual EPS forecast from 9.0.-10.0 USD to 9.5-10.0 USD. GM achieved these results thanks to strong truck sales and record electric vehicle sales. Compared to GM’s successful report, Ford’s results appear weak.

These combined factors undermined investor confidence in Ford, leading to a sharp decline in the company’s stock price.

Pros and cons of investing in Ford Motor Co.’s stock

Despite the adverse investor reactions to Ford’s report, there are arguments for both buying shares and avoiding investment.

Arguments for buying Ford Motor Co.’s stock

The interest rate – market participants expect the Federal Reserve to start the interest rate-cutting cycle in September. For consumers, this means lower loan rates, which will, in turn, reduce the cost of loans on Ford cars. This may positively affect demand and revenue as vehicle prices remain unchanged. This factor may also positively impact other US car makers.

Electric vehicles – given the demand for electric cars, Ford is shifting its focus to higher-margin compact electric vehicles. While competition in this segment is intense, the company has extensive expertise and developed production facilities. Sales growth in the electric vehicle segment could improve the financial position of the Ford E division and bring it out of losses. However, this is a prospect for the next few years, as Ford does not expect profits in this area until the end of the year.

Dividends are probably the main reason 41 hedge funds hold stakes in Ford, totalling 1.54 billion USD. With a stock price of 10 USD, Ford’s dividend is 6.13%, which is more than 2.00% higher than the yield on treasury bonds as of August 2024. Additionally, the company has been making additional dividend payments for many years, which generally increases shareholder profitability.

Arguments against investing in Ford Motor Co.’s stock

Lack of growth potential – revenue of 47.8 billion USD indicates a 28% increase from ten years ago. This means that the car market has reached a certain level and does not have the catalysts to boost revenue through sales growth significantly. The company will need to find new revenue streams.

Competition – the Ford E division will likely continue to show double-digit growth rates, but competition in this segment is very intense. The car, with which Ford plans to enter the budget market, costs about 30,000 USD. For comparison, the price of the cheapest BYD Seagull electric vehicle is about 15,000 USD. Ford can compete with this model given the US’s 100% duty on Chinese electric cars. However, there is also Tesla, which has its popular Model 3 electric vehicle priced at 35,000 USD. Tesla is also working on the low-budget Model 2, the price of which will start at 25,000 USD. As a result, Ford’s electric vehicle margins may be lower than planned.

Business profitability – Ford’s operating margin was 2.39% in August 2024, indicating the company is teetering on the brink of profitability. For comparison, GM’s operating margin is 6.50%, and Tesla’s margin is 7.60%. Any economic disruption in the US could turn Ford into a loss-making business.

Vehicle quality – Q2 showed the impact that vehicle quality issues can have on the company’s earnings. If Ford fails to address reliability issues, this could negatively impact both profit and revenue due to declining sales. Consumers always have a choice when selecting a car.

After weighing all the pros and cons, investing in Ford’s stock is primarily justified by its high dividend yield. The company’s growth potential is constrained by intense competition and a saturated automotive market, suggesting that challenges faced by one manufacturer may benefit others.

Technical analysis of Ford Motor Co.’s stock

Since March 2022, Ford’s stock has been trading between 9 and 14 USD. During this period, quarterly earnings reports have fluctuated, occasionally exceeding expectations but also falling short of these. Despite these variations, none of the reports have pushed the stock price outside this range, indicating that the 9 USD support and 14 USD resistance levels are robust. The Q2 2024 report caused a sharp decline to support at 9 USD, but this level has held firm. This scenario supports an optimistic forecast for Ford’s shares. Given that the stock price has rebounded from this support, it is expected to rise towards the upper boundary of the range at 14 USD. Achieving this target could provide a 35% profit for shareholders.

Ford Motor Co.’s stock analysis and forecast

A negative forecast for Ford’s stock involves a breakout below the 9 USD support level, possibly driven by adverse news and a broader decline in the US stock market. In this scenario, the stock price could fall to 7 USD, and a further breakout below this support could lead to a price drop to 5 USD.

Summary

Ford’s fundamental analysis indicates that the company is teetering on the brink of profitability. Rising warranty costs have significantly impacted its profitability, and the company will struggle to offset these losses through vehicle sales alone. The electric vehicle market remains highly competitive, and Ford does not yet offer a budget electric vehicle.

Considering all the arguments presented in this article, it can be concluded that Ford’s stock is primarily attractive due to its high dividend yield. However, its growth potential is limited by intense competition and a saturated automotive market.

Technical analysis of Ford’s stock suggests that potential speculative investments in the company’s shares could yield returns of around 35%.