Justin Sullivan
Elevator Pitch
I have a Buy investment rating assigned to Ford Motor Company’s (NYSE:F) stock.
I previously highlighted that Ford is a good electric vehicle or EV play in my earlier August 26, 2022 update for F. My positive view of Ford remains unchanged following an evaluation of the company’s Q3 2022 earnings beat and its favorable FY 2022 guidance. As such, I will stick with my Buy rating for F.
What Were Ford’s Expected Earnings?
F’s sell-side consensus Q3 2022 normalized earnings per share or EPS estimate was $0.27. I have sourced this number from multiple financial data services providers, including S&P Capital IQ, FactSet, and Refinitiv. This is also the same figure quoted in an October 27, 2022 article posted on the Nasdaq website.
Do note that there is a different Wall Street’s consensus third quarter non-GAAP adjusted bottom line forecast of $0.30 per share for Ford, based on this news article and the earnings surprise data page.
For the purpose of this article, I will be referring to the market’s expected Q3 earnings for Ford as $0.27 per share, relying on the consensus data obtained from the key financial data services providers.
Did Ford Beat Earnings?
Ford delivered an earnings beat for the third quarter of 2022. According to its Q3 2022 10-Q filing released on October 26, 2022 after trading hours, F’s actual non-GAAP adjusted EPS of $0.30 was +11% higher than the consensus normalized bottom line projection of $0.27 per share.
The market responded positively to Ford’s EPS beat. Ford’s shares rose by +1.4% from $12.82 as of October 26, 2022 to close at $13.00 at the end of the October 27 trading day. On the same day, the S&P 500 and Nasdaq declined by -0.61% and -1.63%, respectively.
In the next section, I highlight a few metrics which explain why Ford managed to beat analysts’ expectations with its recent quarterly earnings.
F Stock Key Metrics
There are certain metrics disclosed as part of F’s Q3 financial results which investors should watch.
One key metric is revenue. Ford’s total revenue rose by a reasonably strong +10% YoY to $39,392 million for Q3 2022 as revealed in its recent quarterly 10-Q filing. F’s actual Q3 2022 topline turned out to be +5% higher than the Wall Street analysts’ consensus forecast of $37.5 billion as per S&P Capital IQ data. The main driver for F’s topline beat in the recent quarter is higher-than-expected price increases. Ford specifically mentioned at its Q3 2022 results briefing that it has witnessed “continued strength in pricing.”
Another key metric is the profitability of F’s business in South America. Ford saw its EBIT margin for the South American market expand substantially from 0.3% in the third quarter of 2021 to 16.9% in the most recent quarter. F attributed this massive improvement in profitability for South America to “tough capital allocation and restructuring decisions” as per management’s comments at the recent third quarter earnings call. As an example, Ford chose to stop manufacturing activities in Brazil last year.
What To Expect After Earnings
Investors should expect Ford to do well in the near term after its recent Q3 2022 earnings, judging by the company’s management guidance.
F revised the company’s full-year fiscal 2022 free cash flow guidance upwards from $5.5-$6.5 billion previously to $9.5-$10.0 billion now, in tandem with its Q3 2022 earnings announcement. Separately, Ford changed its FY 2022 EBIT guidance from $11.5-$12.5 billion to “about $11.5 billion” as highlighted in its 10-Q filing. While this might seem to be a slight cut in guidance, the new FY 2022 EBIT guidance of $11.5 billion is still approximately +2% higher than the prior sell-side’s consensus EBIT estimate of $11.3 billion as per S&P Capital IQ.
In a nutshell, Ford raised its expectations of free cash flow generation for the current year in a significant manner, while its updated EBIT guidance for this year is still better than what Wall Street was forecasting.
At a fireside chat hosted by BofA (BAC) Securities on October 27, 2022, a day after its Q3 results release, Ford stressed that “our order bank remains extremely strong” and emphasized that its products “are in high demand” thanks to “a fresh product lineup.” This explains why F has a favorable view of its prospects in the short term, which is reflected in its cash flow and EBIT management guidance.
What Is Ford’s Long-Term Outlook?
In assessing F’s long-term growth prospects, Ford Pro is one specific key driver that investors should really focus on. The company describes Ford Pro as a provider of a single platform integrating “software, charging, service and financing” for “commercial customers” to “accelerate their productivity” in a media release published in late April this year.
F has disclosed a number of metrics at the recent Q3 2022 earnings briefing and the BAC investor event that offer an indication of Ford Pro’s growth potential in the long run.
At its most recent Bank of America fireside chat on October 28, 2022, the company noted that “paid telematics subscriptions globally at Ford Pro” increased by more than +40% QoQ for the third quarter running in Q3 2022. Earlier, F highlighted at its most recent quarterly investor call on October 27 that it is targeting to have “1,200 mobile service units in operation” worldwide by end-2022 as part of Ford Pro. More significantly, F expects the growth in Ford Pro’s “mobile service units” to translate into “more than $10,000” of “dealer parts and service revenue” on a monthly basis for the company.
As another indication of Ford Pro’s contribution to the company’s long-term growth, F has guided for Ford Pro to achieve sales of around $45 billion in fiscal 2025, which will represent as much as 27% of the company’s consensus FY 2025 total revenue of approximately $165 billion (source: S&P Capital IQ).
In conclusion, I have a favorable opinion regarding the long-term outlook for Ford. Specifically, I see Ford Pro as a driver of revenue growth (from a small base) and margin expansion (an increase in the proportion of revenue generated from higher-margin software and services) for the company in the long run.
Is F Stock A Buy, Sell, Or Hold?
I still rate F’s stock as a Buy. I think the company will do well in both the short term and long term. In the near term, demand for Ford’s vehicles is still healthy, and the company has been able to push through price hikes. In the long run, the growth of Ford Pro should lead to revenue expansion and profitability improvement for the company.
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