Ford: 2022 Target at Risk (NYSE: F)
On 9/19, Ford Motor Company (New York Stock Exchange: F) revealed disappointing news that it will have about 40,000 to 45,000 vehicles in stock by the end of the third quarter due to a shortage of spare parts, noting that a high percentage of vehicles are waiting Missing parts include high-demand, high-margin models such as trucks and SUVs. Inevitably, a portion of the lost revenue will be transferred to the fourth and third quarters. Adjusted EBIT is expected to be between $1.4 billion to $1.7 billion, including $1 billion in additional supply costs arising from inflation. The EBIT is materially lower than the $2.9 billion street. On the bright side, the company reiterated its adjustment for 2022. EBIT is between $11.5 and $12.5 billion, in line with $11.9 billion on Street despite limited inventory available and higher supply chain costs.
Private or industry-wide?
The Ford case appears to have taken the market by surprise as most companies had reported supply chain issues. However, in the second quarter of the year, rival General Motors (GM) highlighted similar challenges that resulted in 95,000 vehicles with missing components. Toyota(TM) saw revenue fall 23% in the second quarter due to supply chain issues, and the executive vice president of North American Sales said the current chip shortage isn’t likely to improve until the summer of 2023.
It’s also interesting to note that not every automaker is treated equally in an environment of chip scarcity. For example, in 2021, Ford had problems with the Renesas fire in Japan in the second quarter, while General Motors did not. In the third quarter, General Motors had problems with the Covid-19 outbreak in Malaysia and Ford did not. The main takeaway here is that supply chain challenges remain and are likely to continue into 2023.
What is the effect?
Assuming 40,000-45,000 lost vehicles each could generate roughly $10,000 of contribution margin, this equates to $400-$450 million in impact in the third quarter of 22. Plus the additional $1 billion from higher supply costs , the total impact on third-quarter earnings before interest and taxes should be $1.45 billion to $1.45 billion. This largely explains why EBIT for the third quarter of this year is estimated at $1.4-1.7 billion versus about $3 billion. However, the fact that management kept the full 2022 earnings on hold was encouraging and suggests that pricing or the right mix could be a factor. However, macroeconomic factors such as rising interest rates may make some investors begin to question the sustainability of positive pricing from a demand standpoint.
Inflation and supply chain challenges remain largely a wild card for Ford and the auto industry in general, and demand is not entirely immune from rising label prices and interest rates. While some investors may still see Ford as an attractive investment driven by significant redesign and restructuring initiatives (Ford+, electrification and autonomy), my sense is that Ford’s EBIT target for 2022 may be at risk due to rising supply costs and deteriorating Macroeconomics may cause consumers to think twice before buying a new car. The seasonally adjusted annual rate (SAAR) of US light vehicle sales fell 9% year over year to 13.5 million in July 2022. I would also note that the University of Michigan Vehicle Purchase Conditions Study is now at its lowest level in 10 years. .
From a valuation standpoint, Ford is generally understood to be cheap at 6.6 times forward earnings versus the one-year average of 8.2 times. 2022 EPS. It has seen 17 bullish revisions while revenue has seen 5 bullish revisions over the past three months, indicating a high level of confidence among the analyst community that Ford will meet expectations. However, those estimates may now be called into question as Ford will continue to contend with higher supply costs and may have to raise prices to maintain margins. If demand weakens and profitability diminishes, the stock may be reclassified to the downside.