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Ford (F) Research Report: Q4 CY2023 Update


Full Report / June 04, 2024

Automotive manufacturer Ford (NYSE:F) reported Q4 CY2023 results exceeding Wall Street analysts' expectations, with revenue up 4.5% year on year to $45.96 billion. It made a non-GAAP profit of $0.29 per share, down from its profit of $0.51 per share in the same quarter last year.

Ford (F) Q4 CY2023 Highlights:

  • Revenue: $45.96 billion vs analyst estimates of $41.59 billion (10.5% beat)
  • EPS (non-GAAP): $0.29 vs analyst estimates of $0.12 ($0.17 beat)
  • Gross Margin (GAAP): 4.6%, down from 9.3% in the same quarter last year
  • Free Cash Flow of $197 million, down 91.7% from the previous quarter
  • Sales Volumes were flat year on year
  • (4% in the same quarter last year)
  • Market Capitalization: $48.67 billion

Established to make automobiles accessible to a broader segment of the population, Ford (NYSE:F) designs, manufactures, and sells a variety of automobiles, trucks, and electric vehicles.

Ford's introduction of assembly line production revolutionized the manufacturing industry, significantly lowering the cost of production and selling price of automobiles. This innovation democratized vehicle ownership and set a new standard in industrial manufacturing, propelling Ford to become a key figure in the automotive sector.

Today, Ford offers a comprehensive range of automotive products, including passenger cars, trucks, and electric vehicles (EVs). It also owns Lincoln, its line of luxury vehicles. The company's revenue is derived from vehicle sales, financing for those vehicles through Ford Credit, and other automotive services like digital connectivity.

The company maintains a mixed cost structure, with significant fixed costs related to manufacturing plants, R&D facilities, and labor. On the other hand, its variable costs are tied to raw materials, parts, and production volume.

In recent years, Ford has shifted its strategy towards electrification and smart vehicle technology. The company has invested heavily in EVs, such as the Mustang Mach-E and F-150 Lightning, and autonomous driving technology through its strategic partnership with Argo AI. Ford's autonomous driving services are sold on a subscription basis, mirroring Tesla's original self-driving strategy.

Automobile Manufacturers

Much capital investment and technical know-how are needed to manufacture functional, safe, and aesthetically pleasing automobiles for the mass market. Barriers to entry are therefore high, and auto manufacturers with economies of scale can boast strong economic moats. However, this doesn’t insulate them from new entrants, as electric vehicles (EVs) have entered the market and are upending it. This has forced established manufacturers to not only contend with emerging EV-first competitors but also decide how much they want to invest in these disruptive technologies, which will likely cannibalize their legacy offerings.

Ford's competitors in the automotive industry include General Motors (NYSE:GM), Toyota (NYSE:TM), Volkswagen (OTC:VWAGY), and Honda (NYSE:HMC).

Sales Growth

A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones demonstrate sustained growth over multiple years. Over the last five years, Ford grew its sales at a weak 1.9% compounded annual growth rate. This shows it failed to expand its business in any major way. Ford Total Revenue

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on new catalysts such as a contract win or a successful product line. Ford's annualized revenue growth of 13.7% over the last two years is above its five-year trend, suggesting its demand has recently accelerated.

We can dig further into the company's revenue dynamics by analyzing its sales volumes, which reached 1.15 million in the latest quarter. Over the last two years, Ford's sales volumes averaged 6.9% year-on-year growth. Because this number is lower than its revenue growth, we can see the company benefited from price increases. Ford Year-On-Year Volume Growth

This quarter, Ford reported reasonable year-on-year revenue growth of 4.5%, and its $45.96 billion of revenue topped Wall Street's estimates by 10.5%. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months, a deceleration from this quarter.

Gross Margin & Pricing Power

Gross profit margins tell us how much money a company gets to keep after paying for the direct costs of the goods it sells.

Ford has poor unit economics for an industrials business, signaling that its products are commodities and it operates in a competitive market. As you can see below, it's averaged a paltry 8.9% gross margin over the last five years. That means Ford must pay its suppliers a lot of money ($91.06 for every $100 in revenue) to provide its products and services.

Ford Gross Margin

In Q4, Ford produced a 4.6% gross profit margin, down 4.7 percentage points year on year. Zooming out, Ford's margin has been trending down over the last 12 months, decreasing by 1.8 percentage points year-on-year. If this trend continues, it could suggest a more competitive environment.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Ford was profitable over the last five years but held back by its large expense base. It demonstrated weak profitability for an industrials business, producing an average operating margin of 1.6%. This isn't too surprising given its low gross margin as a starting point for ultimate operating profitability.

On the bright side, Ford's annual operating margin rose by 2.7 percentage points over the last five years.

Ford Operating Margin (GAAP)

This quarter, Ford's breakeven margin was down 4.1 percentage points year on year. Since Ford's gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased general expenses like sales, marketing, and administrative overhead.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Ford's EPS grew at a decent 9.2% compounded annual growth rate over the last five years, higher than its 1.9% annualized revenue growth. However, this alone doesn't tell us much about its day-to-day operations because its operating margin didn't expand.

Ford EPS (Adjusted)

Diving into Ford's quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Ford's operating margin declined this quarter but expanded by 2.7 percentage points over the last five years. This was the most relevant factor (aside from revenue) behind its higher earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. Although it performed well, Ford's two-year annual EPS growth of 12.3% was lower its 13.7% two-year revenue growth.

In Q4, Ford reported EPS at $0.29, down from $0.51 in the same quarter last year. Despite falling year on year, this print easily cleared analysts' estimates. Over the next 12 months, Wall Street expects Ford to perform poorly. Analysts are projecting its EPS of $2.01 in the last year to shrink by 18.2% to $1.65.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Ford has shown mediocre cash profitability over the last five years, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin averaged 5.9%, subpar for an industrials business.

Taking a step back, we can see that Ford's margin dropped by 2.6 percentage points during that time. Its unexciting margin and trend put the company in a tough spot, and shareholders are likely hoping it can reverse course.

Ford Free Cash Flow Margin

Ford broke even from a free cash flow perspective in Q4. This quarter's result was good as its margin was 2.4 percentage points higher than in the same quarter last year, but we wouldn't read too much into it because working capital needs can be seasonal and cause quarter-to-quarter swings in the short term.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money it has raised (debt and equity).

Ford's five-year average ROIC was 8.4%, somewhat low compared to the best industrials companies that consistently pump out 20%+. Its returns suggest it was mediocre at investing in profitable business initiatives.

Ford Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Over the last few years, Ford's ROIC has increased. This is a good sign, and we hope the company can continue improving.

Balance Sheet Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly.

Ford's $149.2 billion of debt exceeds the $40.17 billion of cash on its balance sheet. Furthermore, its 6x net-debt-to-EBITDA ratio (based on its EBITDA of $16.94 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Ford could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Ford can improve its balance sheet and remain cautious until it increases its profitability or reduces its debt.

Key Takeaways from Ford's Q4 Results

We were impressed by how significantly Ford blew past analysts' volume expectations this quarter. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its operating margin missed. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The stock is flat after reporting and currently trades at $12.18 per share.

Is Now The Time?

Ford may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We appreciate companies solving complex business problems, but in the case of Ford, we'll be watching from the sidelines. Its revenue growth has been weak over the last five years, and analysts expect growth to deteriorate from here. And while its rising returns show management is finding more profitable business opportunities, the downside is its projected EPS for the next year is lacking. On top of that, its low gross margins indicate some combination of competitive pressures or rising production costs.

Ford's price-to-earnings ratio based on the next 12 months is 7.4x. While there are some things to like about Ford and its valuation is reasonable, we think there are better opportunities elsewhere in the market.

Wall Street analysts covering the company had a one-year price target of $12.90 right before these results (compared to the current share price of $12.18).

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