Despite a positive day for the S&P 500, share prices of Ford Motor Company (F +1.15%) fell 9.7% last Friday after the company reported its fourth-quarter 2021 earnings that indicated slowing growth compared to the third quarter of 2021.
However, impressive demand for electric vehicles (EVs) like the Mustang Mach-E SUV, the F-150 Lightning pickup, and the E-Transit electric van show promise that Ford's long-term goals remain intact. Let's break down some key takeaways from the Q4 2021 earnings call, including the company's forecast to reach EV capacity of 600,000 vehicles by 2023, to determine if Ford stock is a buy now.
Two different businesses
During its Q4 2021 earnings call, Ford management went into detail describing the differences between its legacy internal combustion engine (ICE) business and its battery EV (BEV) business. Ford CEO Jim Farley said the following on the conference call:
Running a successful ICE business and a successful BEV business are not the same. The customers are different. We think the go-to-market is going to have to be different. The product development process and the kinds of products we develop are different. The procurement supply chain are all different. The talent is different. The level of in-sourcing is different. And actually, the rhythm of the business is different, fundamentally different.
According to Ford, its EV business moves faster and requires better vertical integration to be profitable. That means procuring parts, batteries, and chips ahead of time or producing batteries in-house to control more of the supply chain. Ford mentioned that having a superior supply chain, low operational costs, and efficient production can be key competitive advantages that will help its margins as it grows its EV business.
Aggressive spending
Ford's strategy is to go on the offensive by investing heavily now to try to gain an edge across its EV product categories. It expects its first-generation EVs to have kinks and cost inefficiencies that Ford will mitigate in second-generation models. The Mustang Mach-E is already profitable. But just in January, Ford identified $1,000 of cost savings it can implement for future models.
F-150 Lightning production starts this spring. Phase one will take place at Ford's new Rouge Electric Vehicle Center in Michigan. By 2025, it expects its Blue Oval City campus in Tennessee will begin producing high volumes of the second generation of the F-150 Lightning. Blue Oval City is an $11.4 billion project that consists of twin battery plants in central Kentucky and another battery plant in Tennessee that will support Ford and Lincoln EVs. Ford's 6-square-mile campus in west Tennessee will be focused on building F-series EVs like the F-150 Lightning.
In sum, Ford is expanding its existing production capacity in Michigan before relying on entirely new facilities to produce its vehicles and make its batteries in-house. It's an extremely capital-intensive endeavor, but it's necessary if Ford wants to hit the goal to have EVs make up 40% of total sales by 2030, a goal that Ford reiterated on the investor call it is on track to hit.
Maintaining profitability
Ford's advantage lies in the optionality its existing ICE business gives its EV investment. It said it will increasingly focus on generating positive free cash flow (FCF) from the ICE business which will fuel added investment in EVs in the years to come.
Despite aggressive spending, Ford expects to continue to be a very profitable company that rakes in a ton of extra FCF that it can use to pay down debt, grow the dividend, and accelerate EV spending. Being a self-sufficient business that can fund future growth from its own operations is a big advantage that companies like Ford, General Motors, and Tesla have over newer pure-play EV companies like Rivian Automotive. Rivian is likely years away from positive FCF and will have to rely on capital markets to fund its growth. Ford doesn't have that problem. Ford's ability to have enough FCF to fund its operations and grow its dividend is one reason why Ford stock is going to offer a better risk/reward for most investors than a speculative company like Rivian.
Ford is guiding for 2022 adjusted EBIT between $11.5 billion to $12.5 billion, which would be an increase of 15% to 25% compared to 2021. It would also give Ford a price-to-EBIT ratio of just 5.98, giving Ford an inexpensive valuation especially considering its growth rate. Ford's net income -- which is a generally accepted accounting principle (GAAP) metric -- includes its stake in Rivian. The value of this stake has swung by hundreds of millions of dollars or even upward of $1 billion in a single day. Therefore, investors are probably better off tracking EBIT than net income for 2022.
A complete business with room to run
Ford reinstated a quarterly dividend of $0.10 per share and made it clear it values the dividend as a driver for shareholder value given its investor base. At the current stock price, Ford has a dividend yield of 2.2%, which is the cherry on top of a fundamentally strong business.
Given Ford's growth prospects, aggressive spending, dedication to growing battery and EV production, inexpensive valuation, high profitability, and its dividend, there's an argument that Ford is the single best all-around automotive stock for 2022 and beyond.
