There is no scarcity of beaten-down stocks out there right now. The S&P 500 index has dropped about 25% so far in 2022 through mid-October. One iconic stock that has performed significantly worse is Ford (F 3.03%).
The more than century-old automaker continues to have some very popular models, but investors aren't buying into its plans to succeed in a sector that is transitioning to electric vehicles (EVs). With the stock down about 42% year to date, here are three things for investors to consider to see whether now looks to be a good time to take advantage of the stock's underperformance.
NYSE: F
Key Data Points
1. Not moving to just EVs
Unlike some competitors including General Motors, Ford is taking a more holistic approach for its future business. GM says it will convert to a full EV company by 2035. Ford plans to spend $50 billion to grow an electric vehicle division it dubs Model e, but it will also maintain another division for its legacy internal combustion engine (ICE) vehicles as well as a third segment for commercial and government customers. That Ford Pro business will supply both work-ready ICE and electric products. It will report results from each segment separately beginning next year under the Ford+ corporate umbrella.
That could be an advantage for Ford in the future. Investors will want to dig into the details once the company presents financial results for each segment separately. For now, Ford's overall U.S. sales are showing mixed results. Though off a low base, its September 2022 EV sales nearly tripled versus last year. Hybrid sales have grown 22.6% for 2022 through September to more than 74,000 units. But overall car and truck sales are down 34.4% and 7.7%, respectively, year to date through September. Some headwinds the company currently faces aren't unique to Ford, however.
Image source: Ford.
2. Current headwinds won't last forever
Those headwinds include supply chain challenges and sharply rising raw material costs. When Ford reported second-quarter results in late July, management said it expected $4 billion in additional commodity costs for the full year and an additional $3 billion in other "inflationary pressures." That was $1 billion more than it estimated in the prior quarter, and it has added another $1 billion to that in a September update. The cost increases are clearly not easing for the company this year, but they will peak at some point.
In the meantime there will be cost reduction measures sought and price increases for its customers. One example is with its new F-150 Lightning. Recently, for the second time in just two months, the company increased the price of the electric pickup truck. The base price for its Lightning Pro model increased by more than 10% to $51,974. That's also 30% higher than the original pricing below $40,000 that Ford announced in May 2021. So the company is working to offset its rising input costs.
3. Could profits be a problem?
The big question is whether or not that will be enough. Ford has already warned investors that the current supply chain constraints kept more than 40,000 nearly finished vehicles from being sold in the third quarter as they waited on parts. As mentioned above, that comes as the company spent an unanticipated $1 billion in the quarter for inflation-related supply expenses.
Those rising costs should be of particular concern to investors. Ford's operating profit margins are already below that of peers like General Motors. In the first six months of 2022, Ford reported auto revenue of $70 billion and earnings before interest and taxes of $5.2 billion. That works out to a profit margin of 7.4%. That compares to a profit margin of nearly 9% for GM in that same time period. GM additionally had vehicles partially built awaiting parts in its second quarter similar to what Ford faced in its third quarter. That shifted some of GM's sales into the third quarter, so that profit margin could have been even higher.
Ford said it expects to achieve "significantly higher profits in North America" for the balance of 2022. But if the U.S. economy slows or growth turns into contraction, that will be difficult to attain. Ford may be a good long-term investment from these levels. But at a time when the business is transitioning, investors might want to first see how it will weather what could be a downward move in the economy before making a full allocation. If those conditions lead to losses in the near term, the stock may be punished even further.
