Ford Stock Rallies As EV Strategy Takes Center Stage

-Revenue increased to $40.2 billion, up 35% from the same quarter the previous year.

-EBIT came in at  $3.7 billion and net income came in at $667 million.

-Ford has guided an EBIT of $11.5-$12.5 billion for the year, and adjusted cash flow at $5.5-$6.5 billion.

“We’re moving with purpose and speed into the most promising period for growth in Ford’s history – to innovate and deliver great products and connected services, raise quality and lower costs,” said CEO Jim Farley. “We’re giving customers great experiences and value, improving our profitability and making Ford the next-generation transportation leader.”

Ford NYSE: F is an American multinational that produces a range of automobiles. Based out of Dearborne, Michigan, the company’s shares were up 7% in pre-market trading, as results came in stronger than expected.

Ford increased its market share from 4.9% to 5.3% for the quarter as new models, especially EV models, continued to push revenue higher.  The company sold over 1 million vehicles for the quarter as its strategy to increasingly move its product mix towards EVs started paying dividends. North American market share remains in the double-digits at 12.9%, while Ford continues to struggle internationally, with a 2% market share in Latin America, 6% in Europe, and 2% in China. Ford’s international strategy has been hampered by poor market execution and poor after-sales service.

Ford’s business is expected to revolve around three businesses: Ford Blue, Ford Model E and Ford Pro. Ford continues to benefit from demand for the internal combustion engine (ICE) based commercial trucks and vans, but management is increasingly witnessing that traditional customers are now considering and evaluating electric vehicles.

Ford has introduced a number of electric models, including the Mustang Mach-E, F-150 lighting, and E-transit. Ford has estimated that the run-rate for EVs will hit 600,000 vehicles by 2023 and 2 million vehicles by 2026. Demand remained robust for the quarter as the North American product bank sold out in May with products such as the F-150 Lightning EV doing exceptionally well.

Internationally there was good news as well, as South American operations, which were restructured, have started to become profitable as well, after years of producing losses, meanwhile, China continued to struggle as the pandemic continued to weigh on sales. Ford’s China sales are increasingly important to Ford’s future and China remains one of the few international markets where Ford’s strategy has done reasonably well. Once pandemic restrictions are fully lifted, Ford should witness significant improvements in the Chinese market.

The Mustang Mach-E has been a winner for Ford selling almost 27,000 vehicles in 2021. Early sales in 2022 showed the model in fifth position in the U.S., with sales coming in at 6734 for the first quarter, slightly above sales in 2021. Model Y remained in first place with 55,000 units.

The company has guided that sales will increase anywhere from 10-15% in 2022, but the company faces a number of headwinds to its bottom line. Inflationary pressures largely stemming from commodities are being offset by improvements in pricing and mix. Ford also anticipates cutting around 8000 jobs this year as the company looks to improve its labor-to-production ratio and become a leaner operation.

Taking a closer look at Ford’s financials

Net income margin fell slightly for the quarter to 1.7%, the company’s low net income margin stemming from a mix of issues, including labor-intensive manufacturing, supply chains, and commodity pressures all weighing on results.  Ford is expected to produce an EPS of around $2 to $2.2 for the year, which would put the forward P/E at around 6-7. Debt to equity remains elevated at 3, but management has outlined plans to reduce debt by around 7.6 billion moving forward.

Ford is increasingly relying on its EV cars in order to get back to historical levels of profitability and the current results show that might be possible. Ford expects to launch numerous EV models and up to seven new models by 2024.  Ford is also relying on offering lower-cost batteries and expects consumers to forego range so that the price of its vehicles is lower. It remains to be seen whether this strategy will work, considering other EV players have focused on range rather than on pricing.  Ford’s biggest issue is that it cannot improve profit margins and investors will look to results in the next couple of quarters as the product mix increasingly moves away from combustion engines toward EVs.  Finally, Ford’s poor strategy when concerning the international market also remains a key factor investors will look to, and should Ford execute better internationally, the stock could head higher, after being stuck at the current level for a few years now.