Ford’s Compelling Value Amidst Industry Challenges: A Buy Rating

1. Bullish Auto Sales and Strong Travel Trends

With robust travel expected around the 4th of July, building on bullish auto sales trends, automakers like Ford are well-positioned for a strong second half of the year. According to WardsAuto, May US light vehicle sales increased by 0.8% year-over-year, resulting in a seasonally adjusted annualized rate of 15.9 million vehicles. This exceeded estimates, highlighting strong demand for traditional internal combustion engine (ICE) autos and hybrid vehicles despite the challenges faced by the EV market.

2. Optimistic Earnings and Valuation

Ford’s recent earnings report demonstrated resilience and potential for growth:

• Q1 Performance: Ford reported a non-GAAP EPS of $0.49, surpassing the Wall Street consensus estimate of $0.44. Revenue for the quarter was $42.8 billion, up 3% from the previous year, exceeding expectations by $1.3 billion. Strong profitability was driven by the Ford Pro segment and lower-than-expected losses in its Model e segment.
• Future Projections: Ford’s management revised its free cash flow and capex outlooks but maintained its earnings guidance. Adjusted EBIT is now expected at the high end of the $10 billion to $12 billion range, with free cash flow projected between $6.5 billion and $7.5 billion.

3. Ford’s Strengths and Opportunities

• Valuation: Ford’s current valuation is compelling, with a forward P/E ratio of 5.9, significantly lower than its 5-year average of 8.1 and the sector median of around 16x. If we assume $2 of normalized operating EPS and apply the 5-year mean P/E, then shares should be valued close to $16.50, making Ford an attractive investment.
• Free Cash Flow and Dividend Yield: With a very high free cash flow yield of around 10% and a dividend yield of approximately 5%, Ford offers strong returns to shareholders. The company’s ability to generate substantial free cash flow provides an opportunity for further dividend payments and potential share buybacks.
• Product Mix and Innovation: Ford has been successful in executing its One Ford plan, delivering best-in-class vehicles. The company is also making balanced investments across electrification, autonomy, and mobility services, positioning itself well within the evolving auto industry.

4. Key Risks

• Macroeconomic Downturn: A significant economic downturn could negatively impact the auto market, reducing consumer demand for new vehicles.
• Input Costs: Higher input costs, similar to those experienced in 2022, could threaten Ford’s margins. The automotive industry is highly sensitive to fluctuations in the prices of raw materials.
• Geopolitical Risks: Disruptions in the supply chain due to geopolitical issues could affect production and delivery timelines, impacting Ford’s operations.
• Gas Prices: Higher gas prices could be a headwind for Ford’s traditional vehicle sales, potentially shifting consumer preference towards more fuel-efficient or electric vehicles.

5. Technical Analysis

Ford’s stock has experienced a prolonged downtrend since peaking above $25 in early 2022. Key technical levels to watch include:

• Resistance: The downtrend line from the $18 high in Q2 2022 comes into play near $13.50 today. Breaking above this level would be a positive signal.
• Support: Strong support is evident in the $10.50 to $11 range. A dip below this range would be concerning.
• Bullish Signal: The false breakdown last November may have shaken out weak hands, suggesting potential for a reversal. A breakout above $14 would confirm a reversal and improve the technical outlook.

6. Conclusion: A Buy Rating with Caution

Despite the challenges and current technical downtrend, Ford’s strong fundamentals, compelling valuation, and significant free cash flow make it a valuable investment. Investors should consider the following strategy:

Investment Strategy:

• Buy: Initiate positions at current levels for long-term gains, especially if the stock breaks above $14. This would signal a technical breakout, aligning with Ford’s growth potential and high yield.
• Monitor: Keep an eye on macroeconomic indicators, input costs, and gas prices for potential risks that could impact Ford’s performance.

Overall, Ford’s strategic investments in electrification, autonomy, and mobility services, coupled with its solid financial performance, position it well for future growth. The stock’s undervaluation and high free cash flow yield offer a compelling opportunity for value investors, making it a buy recommendation despite the current market challenges.