Recently, Ford Motor Company (F 1.76%) has rewarded its long-suffering shareholders handsomely. Prior to the onset of the COVID-19 pandemic, Ford stock had been in a multiyear downtrend and traded for around $10. The pandemic made matters worse, causing shares of the storied automaker to briefly plummet below $4.
However, a sharp rebound in Ford's financial results helped the stock recover to nearly $10 by the end of 2020. Over the past five months, continued financial improvement and growing excitement about the company's electric vehicle (EV) plans ignited an even bigger rally. Ford shares eventually peaked at a multidecade high of $25.87 in mid-January.
Ford stock started to retreat in late January. It took an even bigger dive following the company's fourth-quarter earnings report, tumbling 10% to $17.96 on Friday. This puts the shares at a much more reasonable level relative to Ford's current turnaround progress.
A shaky end to 2021
Last October, Ford reported stellar results for the third quarter of 2021. Adjusted earnings per share (EPS) reached $0.51: nearly double the analyst consensus. Meanwhile, Ford generated $7.7 billion of adjusted free cash flow, thanks to the working capital benefit of returning to more normal production rates as the global semiconductor shortage started to ease.
By contrast, adjusted EPS fell to $0.26 in the fourth quarter: $0.15 shy of the analyst consensus. Ford posted an adjusted operating margin of 5.4% last quarter, compared to 8.4% in Q3. Adjusted free cash flow remained solidly positive at $2.3 billion.
For the full year, Ford generated an adjusted operating profit of $10 billion, adjusted EPS of $1.59, and $4.6 billion of adjusted free cash flow on $136.3 billion of revenue. Earnings and cash flow easily surpassed pre-pandemic levels, despite lower revenue due to supply constraints related to the chip shortage.
On the other hand, Ford lost money in South America, Europe, and China -- three of its five regional segments -- during 2021. In the fourth quarter, Ford's losses in Europe and China increased year over year. While management says the company is making progress on turning around its struggling overseas divisions, there's clearly a lot of work left to get those units back on track.
Expecting further progress in 2022
Ford expects production to decrease year over year this quarter, due to continued supply constraints for key components. For example, the automaker is taking downtime for many of its key products this coming week due to parts shortages. However, on a full-year basis, the company anticipates growing wholesale volume 10% to 15% compared to 2021, driving revenue higher.
This revenue growth should enable Ford to expand its adjusted operating profit to between $11.5 billion and $12.5 billion in 2022, with strong growth in North America more than offsetting lower earnings from its finance subsidiary. Ford also estimates that adjusted free cash flow will improve to between $5.5 billion and $6.5 billion.
Looking to 2023 and beyond, Ford stands to benefit from easing supply constraints and restructuring efforts outside North America. That should support continued revenue and earnings growth, assisted by Ford's growing portfolio of EVs. The company also may have opportunities to cash in on its stake in Rivian and monetize its self-driving affiliate, Argo AI.
A healthy pullback
At its peak a few weeks ago, Ford stock traded for 16 times the company's 2021 adjusted EPS of $1.59. That represented a fairly aggressive valuation compared with its peers, particularly given Ford's ongoing struggles in many international markets. As a result, I sold over half of my Ford shares in December and January.
That said, I'm still hanging on to some of my investment. Ford stock could have substantial upside -- particularly after the recent pullback -- if it can get all of its regional subsidiaries back to reasonable levels of profitability.
Indeed, management's guidance calls for adjusted operating profit to rise 15% to 25% this year, which implies adjusted EPS near $2. Moreover, supply constraints are still weighing on revenue growth, and the company hasn't completed its international restructuring efforts yet. With Ford stock sitting at around $18, there's more than enough upside potential to compensate investors for the risk that Ford never entirely fixes its overseas operations.