After a two-year hiatus in the Indian car market, U.S. auto giant Ford is poised to re-enter the scene, marking a strategic move to leverage the country’s potential for exports. The decision to re-open its manufacturing facility in Tamil Nadu underscores Ford’s broader “Ford+ Growth Plan,” aimed at expanding its global market presence. Notably, Tamil Nadu already hosts several key players in the automotive sector, including Hyundai, Nissan, Renault, VinFast, and Tata Motors’ Jaguar Land Rover division, signaling a competitive landscape for Ford to navigate.
Ford’s exit from India in 2021 was a tough call, driven by prolonged periods of financial struggles despite a hefty $2 billion investment that failed to match the dominance of Asian competitors. However, this re-entry paves the way for Ford to capitalize on its global operational expertise. The company plans to create up to 3,000 jobs over the next three years, painting a picture of growth and revival in India for Ford.
Factors Driving Ford Stock
Ford is placing its bets on the success of its commercial vehicle division, Ford Pro, which is experiencing robust demand and positive traction in the market. The recent launch of the all-new Super Duty model, coupled with a strong order pipeline, has prompted the firm to revise its 2024 EBIT forecast for the Ford Pro unit upwards from $8-$9 billion to $9-$10 billion. This segment, incorporating vehicles, software, and services, holds significant importance for Ford’s future trajectory, with software revenue estimated to hit $1 billion next year, boasting robust gross margins exceeding 50%. By 2026, Ford Pro is projected to contribute 20% of the company’s total EBIT.
Within Ford’s Blue segment, its iconic models like the F-150, Maverick, Bronco, and Mustang present lucrative growth prospects. The introduction of new F-150, Ranger models, along with revamped editions of the Explorer, Expedition, and Navigator, is poised to drive revenue growth. Ford anticipates enhanced profitability in the latter half of 2024, buoyed by these strategic moves.
Despite near-term challenges faced by the Ford Model e division, the division holds the key to long-term growth, focusing on scaling production, digital manufacturing efficiency, and vertical integration. Ford’s popular electric vehicles (EVs), including the Mustang Mach-E and F-150 Lightning, continue to fuel shipments, with plans for the introduction of newer EV models in the pipeline.
Ford’s robust liquidity position, flaunting around $27 billion in cash, enables sustained investment in its Ford+ strategy. Moreover, a dividend yield surpassing 5% adds to its attractiveness for income-oriented investors. Notably, Ford has uplifted its adjusted free cash flow (FCF) projection for the year by $1 billion, now ranging between $7.5-$8.5 billion. The company eyes distributing 40-50% of FCF moving forward, showcasing a strong commitment to rewarding shareholders.
Challenges Ahead for Ford
While Ford’s push towards electrification promises long-term gains, the immediate future might see profitability setbacks. Ford expects a full-year loss ranging between $5 billion and $5.5 billion from the Model e unit, broader than 2023’s $4.7 billion loss, fueled by ongoing pricing pressures and increased investments in next-gen EVs.
In addition, Ford’s warranty and recall costs have been trending upwards, hitting $2.3 billion in the second quarter of 2024, marking a significant sequential and year-over-year rise. These escalating costs are primarily linked to older models, with Ford actively striving to enhance the quality of newer models. However, the efficacy of these efforts in reducing warranty costs might take 12 to 18 months to materialize, implying that Ford could grapple with heightened warranty expenses for a considerable period.
The Zacks Consensus Estimate for Ford’s 2024 earnings per share (EPS) stands at $1.88, signaling a 6.5% decline from the previous year. The 2024 EPS consensus has descended by 14 cents in the past 60 days, highlighting challenges on the horizon for Ford.
Ford Stock Valuation
Ford appears attractive from a valuation perspective currently. The forward sales multiple of 0.25 stands below both the industry average and its own five-year average, indicating a favorable outlook. With a Value Score of A, Ford showcases strong fundamentals that might interest discerning investors.
Expert Opinions on Ford
Ford presently holds an average brokerage recommendation (ABR) of 2.60 on a scale from 1 to 5 (Strong Buy to Strong Sell), derived from inputs by 20 brokerage firms. Out of the 20 recommendations contributing to the ABR, 12 advocate holding positions in the stock.
Investor Considerations
Ford’s promising prospects, particularly in its Ford Pro unit, coupled with an enticing dividend yield and robust liquidity, position the iconic U.S. automaker for long-term prosperity. Anticipated interest rate decreases by the Fed could potentially rekindle consumer interest in significant purchases, benefiting Ford in the process. When combined with the stock’s appealing valuation metrics, Ford emerges as an intriguing investment opportunity for those eyeing sustainable growth.
However, investors should keep a close watch on near-term hurdles. Ford’s 2024 profits might face headwinds due to the underperformance of its Model e unit, while escalating warranty costs add another layer of concern. Monitoring Ford’s advancements in enhancing EV profitability and curbing warranty expenses will be pivotal. Prospective buyers need to consider these dynamics before making investment decisions, while current stakeholders stand to gain from retaining their positions for long-term gains.
Ford’s current Zacks Rank #3 (Hold) signifies a neutral stance on the stock, urging investors to weigh the pros and cons diligently to make informed choices.