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Ford Stock Leaps 10% Higher After Earnings Beat

By Adam Levine-Weinberg – Oct 31, 2021 at 9:07AM

Key Points

  • Last week, Ford reported third-quarter earnings nearly double the average analyst estimate.
  • Ford raised its full-year earnings guidance on the back of its strong Q3 performance and restarted its dividend.
  • As supply constraints ease and production recovers over the next couple of years, Ford's revenue, earnings, and cash flow are poised to reach new heights.

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The automaker delivered a strong profit despite the continued impact of the global semiconductor shortage on production.

Investors are finally starting to believe in Ford Motor Company's (F -0.68%) turnaround plan. On Wednesday afternoon, the auto giant reported strong results for the third quarter of 2021, raised its full-year earnings guidance, and reinstated its dividend. Investors applauded, sending Ford stock up 10% in the final two days of the week.

The latest rally has lifted Ford stock to levels not seen since 2014. Nevertheless, the shares could continue to rise as Ford capitalizes on its recent restructuring moves and an improving supply of semiconductors over the next couple of years.

F Chart

Ford Motor Company stock performance, data by YCharts.

A massive earnings beat

The global chip shortage crushed Ford's production in the second quarter. Chip availability began to improve in the third quarter, driving a 32% sequential increase in vehicle wholesales and a 33% sequential increase in revenue.

Wholesale volume for Ford's consolidated operations still declined 14% year over year to just over 1 billion units. However, automotive revenue slipped just 4%, as the iconic automaker was largely able to offset lower volume with higher prices.

The strong pricing environment partially offset the negative impact of lower volume and higher costs relative to Q3 2020. As a result, Ford reported an adjusted operating profit of $3 billion. The company generated essentially all of its profit from its North American operations and its financing business. Ford's overseas divisions collectively reported a tiny operating profit of $36 million. Still, this marks a big improvement compared to the substantial losses Ford has often reported outside North America in recent years.

Thanks to its solid operating profit, Ford posted adjusted earnings per share (EPS) of $0.51 last quarter: down from $0.65 a year earlier but far ahead of the analyst consensus of $0.27. Ford also generated stunning adjusted free cash flow of $7.7 billion in the quarter, reversing a $5.5 billion outflow in the first half of 2021.

Ford raises its guidance

With production, profitability, and cash flow rebounding from the severe disruptions experienced earlier this year, Ford increased its full-year guidance on Wednesday. The automaker now expects to report full-year adjusted operating income between $10.5 billion and $11.5 billion: up from a prior guidance range of $9 billion to $10 billion.

A pair of Ford Broncos on a rugged mountain.

Image source: Ford Motor Company.

Management also reaffirmed the company's prior target of generating between $4 billion and $5 billion of adjusted free cash flow this year. Based on this outlook and the company's strong balance sheet, Ford will restart its dividend, with a quarterly payout of $0.10 per share.

Ford hasn't provided firm guidance for 2022, but management currently expects wholesales to increase 10% year over year as semiconductor supply gradually improves. That could power further increases in operating income, EPS, and free cash flow. Moreover, even a 10% increase in production wouldn't come close to meeting demand, paving the way for further growth in 2023.

Finally moving in the right direction

Considering the negative impact of the chip shortage, Ford's third-quarter results were quite solid. To be sure, the company hasn't finished turning around its overseas operations, but it has made substantial progress, as shown by its ability to reduce its losses despite production constraints.

As the chip shortage eases and production recovers, Ford should start generating meaningful profits outside of North America. Meanwhile, pent-up demand and key new products like the Bronco and Bronco Sport will drive revenue and earnings growth in North America over the next couple of years.

This momentum puts Ford in great position to exceed its long-term operating margin target of 8% by 2023, translating to annual EPS of more than $2. The company also has valuable investments in electric truck maker Rivian and autonomous driving start-up Argo AI that it could monetize in the years ahead. While Ford stock has more than doubled over the past 12 months, these factors suggest that it still has plenty of upside.

Adam Levine-Weinberg owns shares of Ford. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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