Morningstar

Ford Fights Through Wholesale Drops To Post Q2 Profit

We are raising our fair value estimate to $20 from $17 on higher revenue growth and improved 2021 profits, a 70-basis-point increase in our midcycle EBIT margin to 5%, time value of money, and a lower cost of debt.

Securities In This Article
Ford Motor Co
(F)

Ford’s F second-quarter results showed the company managed the semiconductor shortage better than it thought it would a few months ago. We are raising our fair value estimate to $20 from $17 on higher revenue growth and improved 2021 profits, a 70-basis-point increase in our midcycle EBIT margin to 5%, time value of money, and a lower cost of debt.

Adjusted diluted EPS of $0.13 beat the Refinitiv consensus of a $0.03 loss. Adjusted EBIT including mobility and Ford Credit was $1.1 billion, which declined sequentially from first quarter’s $4.8 billion. North American profit fell to $194 million from $2.9 billion as segment revenue fell by 35% and wholesale units fell 39% due to the chip shortage. Outside North America, only Europe saw a wholesale unit decline (down 35%) but total company unit volume fell by 28%. Management stressed uncertainty about when the chip shortage improves and mentioned Ford’s uniquely high exposure to chipmaker Renesas in Japan, which is recovering from a fire earlier this year. Still, we think management is optimistic about higher inventory by fourth quarter because CFO John Lawler mentioned pricing tailwinds abating in that quarter. The chip shortage will, in our view, remain a problem in 2022 but is at its worst right now.

Strong pricing power helped Ford offset lower volumes in the first half of the year and make total company adjusted EBIT of $5.9 billion despite adjusted free cash burn excluding Ford Credit of $5.5 billion. This burn is mostly due to a $6.6 billion working capital drain as Ford built mostly complete vehicles that it cannot yet sell as it’s waiting for chips. Management raised 2021 free cash flow guidance to $4 billion to $5 billion from $0.5 billion to $1.5 billion on optimism on higher volumes helping working capital improve. Second-half 2021 adjusted EBIT though is guided to $3 billion to $4 billion as volume improvements will be less than headwinds such as $2 billion in higher commodity costs relative to first half.

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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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