Ford Motor posted better-than-expected first-quarter profit Wednesday evening, thanks to the strength of its commercial operations. Positive updates to the full-year outlook sent shares up about 2.5% in after-hours trading. Auto revenue rose 2% year over year to $38.89 billion, missing analyst expectations of $40.1 billion, according to LSEG estimates. Adjusted earnings per share fell 22% to 49 cents, better than the earnings per share estimate of 42 cents. Earnings before interest and taxes fell 19% from last year to $2.76 billion, but EBIT was better than the $2.47 billion analysts had forecast. Ford Why We Own It: We’re in Ford because of management’s focus on getting rid of money-losing businesses, increasing product quality and quickly shifting production based on consumer preferences. All of these factors will support higher profits and cash flows over time, which in turn will lend themselves to higher shareholder returns through dividends and buybacks. Competitors: General Motors, Tesla and Stellantis Weight in portfolio: 2.14% Most recent purchase: December 29, 2022 Initiated: November 24, 2020 In short: Ford’s results show that the year is off to a solid start. Earnings came in much better than expected, thanks to the Ford Pro unit, which seems increasingly undervalued and misunderstood by Wall Street every quarter. One analyst on the conference call – the influential Adam Jonas of Morgan Stanley – even speculated that a tenfold EBIT multiple for the Pro business alone could value the segment at double Ford’s total market cap of $51.75 billion . The momentum in Pro and the sustainable profits it generates is why we’re still baffled by how Ford is trading at one of the lowest price-to-earnings (P/E) ratios in the S&P 500. To get rid of this disconnect benefit, we will continue to pressure management to initiate a buyback. We understand the investments needed to scale electric vehicles and execute Ford+’s business strategy, but the cash flow will be there to balance it all, especially if management delivers on its promise to improve quality and reduce costs to lower. F YTD mountain Ford Motor YTD Owning an automaker has been difficult in recent years, but Ford’s continued capital discipline, willingness to return to hybrids and internal combustion engine (ICE) vehicles, the strength of Pro and the potential advances in quality control/warranty costs keep us in the name. We keep our price target at $15 and maintain our rating of 2, meaning we look for a pullback before considering adding to our position. As of Wednesday’s close, Ford shares are up more than 17% in the past three months. Quarterly Commentary Ford Blue, which represents Ford’s gasoline and hybrid vehicles, saw volumes and revenues decline 11% and 13%, respectively. Sales of $21.8 billion were dragged down by the delay in production of the new 2024 F-150 pickup, which is now being delivered to customers and dealers. Profit fell 65% from last year to $905 million due to lower volumes but also the mix. Material costs and higher warranties also caused a decline in results, although there was an advantage from lower structural costs. Still, we’re pleased to see that Ford was profitable in every market the automaker operates in worldwide, a positive reflection of the significant restructuring actions CEO Jim Farley and management have taken over the years. Ford’s hybrid strategy is also working. Revenue grew 36% in the quarter and is becoming a big part of the global mix. Sales at Ford’s Model E electric vehicle division delivered weak results with volume down 20% and revenue down 84% to $100 million. Both measures reflect sector-wide pressure. The lower volumes shouldn’t really be a surprise, given Ford’s focus on making more in-demand hybrids and ICE vehicles. Nor should the increase in losses by $600 million to $1.32 billion due to lower prices. We expect Ford to remain disciplined with its EV strategy going forward, aligning production and investments with demand. So far, the company aims to sell cars that will be profitable in the first twelve months. If it starts losing money, Ford won’t survive. Here’s an example of Ford taking back control of its EV destiny. It has delayed the launch of its three-row crossovers by two years to wait for demand for electric vehicles to improve and to take advantage of new battery chemistries and sizes that will lower costs for that vehicle. The best story at the automaker right now is Ford Pro, the unit that houses the company’s commercial vehicles. It delivered an exceptional quarter with volumes and revenue increasing by 21% and 36% respectively. Revenue this quarter was $18 billion. Operating profit more than doubled from last year to $3 billion, crushing expectations. Margins of 16.7% exceed management’s mid-teens target. The strong results were driven by higher production of the Super Duty Truck, growth in software and physical services, and operating leverage. Software and physical services remain attractive given the continued and recurring revenue generated with a high gross margin of 40% to 50%. Ford now has about 700,000 paid software subscriptions, up from about half a million in the fourth quarter and up 47% year over year. Turning to quality, which has long been a concern of ours, Ford explained that it is making “real progress” in its goal of making better vehicles. Farley explained that after three months of service, the quality of his 23 model vehicles is 10% better than the previous model year. The current model year is another 10% improvement. These are steps in the right direction, but more needs to be done to reduce recalls and lower warranty costs. Adjusted free cash flow was a miss, consuming about $479 million versus expected revenue of about $1.67 billion. The difference can be explained by the working capital effects of approximately 60,000 vehicles in inventory at the end of the quarter that will be shipped in the second quarter. Ford’s full-year 2024 commentary is another reason shares were higher Wednesday night. The company continues to expect adjusted EBIT to be in the range of $10 billion to $12 billion, but management now sees business moving toward the higher end. This may not be a formal increase, but the consensus was closer to the low end of $10.4 billion and so the numbers are likely to be revised upwards. Ford raised its adjusted free cash flow outlook for the year by $500 million to between $6.5 billion and $7.5 billion. Similar to last year, analysts are strangely negative on Ford’s ability to generate cash this year, based on the consensus estimate of $4.35 billion. With $25 billion in cash and $43 billion in liquidity at quarter end, we continue to believe that buying back shares at the stock’s low single-digit price-to-earnings ratio would be a good use of cash. As the company plans to spend less on electric vehicles this year, management lowered the top end of its guidance range by $500 million to $9 billion. The company expects full-year capital expenditures to be in the range of $8 billion to $9 billion, but says it’s heading toward the lower end. Lower capital investment with higher profits is what we want to see, because greater capital efficiency should translate into a higher multiple. However, the revision in capital expenditure was largely already reflected in the consensus estimate of around $8.5 billion. Ford continues to expect to realize $2 billion in cost savings in areas such as materials, trucking and manufacturing. The company’s segment-level EBIT outlook is also unchanged. (Jim Cramer’s Charitable Trust is long F. See here for a full list of the stocks.) As a CNBC Investing Club subscriber with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charity’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. No fiduciary obligation or duty exists nor is it created by your receipt of any information provided in connection with the Investment Club. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
The new Ford F-150 truck will be launched at a celebratory event at the Ford Dearborn factory on April 11, 2024 in Dearborn, Michigan.
Bill Pugliano | Getty Images
Ford engine posted a higher-than-expected profit in the first quarter on Wednesday evening, driven by the strength of commercial activities. Positive updates to the full-year outlook sent shares up about 2.5% in after-hours trading.