Ford Q1 earnings high, bright outlook for 2024, welcome news on cost discipline

Ford Motor Company on Wednesday evening posted a better-than-expected first-quarter profit, driven by strength in its commercial business. Positive updates to its full-year outlook helped send the stock rallying about 2.5% in after-hours trading. Auto revenue rose 2% year over year, to $38.89 billion, missing analysts’ forecasts of $40.1 billion, according to estimates compiled by LSEG. Adjusted earnings per share fell 22% to 49 cents, beating EPS estimates of 42 cents. Earnings before interest and taxes fell 19% from last year to $2.76 billion, but EBIT was better than the $2.47 billion analysts had forecast. Ford Why we own it : We are at Ford because of management’s focus on getting out of money-losing businesses, increasing product quality, and changing production quickly based on consumer preferences. All of these factors can support higher earnings and cash flow over time, which in turn will lend itself to greater shareholder returns through dividends and buybacks. Competitors : General Motors , Tesla and Stellantis Weight in portfolio : 2.14% Most recent purchase : December 29, 2022 Launched : November 24, 2020 Ford’s results show that the year is off to a good start. The profit came in better than expected, thanks to its Ford Pro unit, which every quarter seems more and more undervalued and misunderstood by Wall Street. €” estimated that 10 times the EBIT on the Pro business alone could value the segment at Ford’s market-wide value of $51.75 billion. The speed of the Pro and the consistent profits it generates are why we continue to be amazed at how Ford trades at one of the lowest price-to-earnings (P/E) multiples in the S&P 500. To capitalize on this cut, we will continue to pressure management to initiate a recovery. We understand the investment needed to accelerate electric vehicles and implement its Ford+ corporate strategy, but the cash flow will be there to balance it all, especially if management keeps its word to improve quality and reduce costs. F YTD mountain Ford Motor YTD It has been difficult to own the automaker the past few years, but Ford’s continued capital discipline, willingness to move back toward hybrids and internal combustion engine (ICE) vehicles, strength in the Pro, and potential development in quality control/warranty costs keep us in the name. We set our price target at $15 and maintain our 2 rating, which means we will look for a solution before considering increasing our position. As of Wednesday’s close, Ford shares have gained more than 17% in the past three months. Quarterly commentary Ford Blue , which represents Ford’s gas-powered and hybrid vehicles, saw volume and revenue decline 11% and 13%, respectively. The $21.8 billion sales result was dampened by production delays for the new 2024 F-150 model, which is now being delivered to customers and dealers. Profits fell 65% from last year to $905 million due to lower volumes but also a mix. Material costs and high warranty also reduced the results, although there were benefits from the lower cost of the structure. Still, we are pleased to see that Ford was profitable in every market in which the automaker operates around the world, a positive reflection of the important restructuring steps CEO Jim Farley and management have made over the years. Ford’s hybrid strategy is working too. Sales grew 36% in the quarter and are becoming a bigger part of its global mix. Sales in the Ford Model E, the electric vehicle division, produced weak results with a 20% lower margin, and revenue down 84% to $100 million. Both measures reflect industry-wide pressure. The low volume shouldn’t be surprising given Ford’s focus on making more desirable hybrids and ICE vehicles. Nor should the loss increase by $ 600 million to $ 1.32 billion from the low price. We expect Ford to remain disciplined with its EV strategy going forward, matching production and investment with demand. To this end, the company is committed to selling cars that will be profitable in the first 12 months. If it loses money, Ford won’t make it. Here’s an example of how Ford is taking control of its EV destiny. It delayed the launch of its three-row crossovers by two years to wait for EV demand to improve and to take advantage of new battery chemistries and designs that will lower the vehicle’s cost. The best story in the automaker right now is Ford Pro, the division that houses the company’s commercial vehicles. It delivered an exceptional quarter with volume and revenue up 21% and 36%, respectively. Sales were $18 billion for the quarter. Operating profits more than doubled to $3 billion from last year and crushed expectations. The rate of 16.7 percent exceeds the management’s target for young adults. Strong results were driven by higher Super Duty Truck production, growth in software and physical services, and operating volume. Software and physical services remain compelling, given the sticky and recurring revenues generated by high margins in the 40% to 50% range. Ford now has about 700,000 subscriptions to paid programs, up from about half a million in the fourth quarter and 47% year over year. Touching on quality, which has long been our concern, Ford explained that it is making “real progress” in its goal of making better cars. Farley explained that through three months of service, the quality of its 23 model cars is 10% better than the previous model year. The current model year is another 10% improvement. These are steps in the right direction, but more must be done to reduce recalls and reduce warranty costs. Adjusted free cash flow was shortchanged by consumption of approximately $479 million against expected generation of approximately $1.67 billion. The difference can be explained by the impact of working capital from the 60,000 vehicles that will remain in inventory at the end of the quarter, which will be shipped in the second quarter. Ford’s full-year forecast for 2024 is another reason why the stock was higher Wednesday night. The company continues to expect its adjusted EBIT to be in the $10 billion to $12 billion range, but management now sees the business tracking toward the high end. This may not be an official increase, but the deal was sitting near the low end at $10.4 billion and so the numbers could be revised further. Ford raised its free cash flow outlook for the year by $500 million to between $6.5 billion and $7.5 billion. Similar to last year, analysts have downplayed Ford’s ability to generate cash this year based on consensus estimates of $4.35 billion. With $25 billion in cash and $43 billion in liquidity at the end of the quarter, we continue to believe that buying back shares at a low single-digit P/E number would be a good use of cash. With the company planning to spend less on EVs this year, management cut the top end of its guidance by $500 million to $9 billion. The company expects full-year capital spending to be $8 billion to $9 billion but said it is managing toward the lower end. Lower quality with higher returns is what we want to see because greater capital efficiency should translate into higher multiples. However, capex revisions were already largely reflected in the consensus estimate of about $8.5 billion. Ford continues to expect to achieve $2 billion in cost reductions in areas such as materials, freight, and manufacturing. The company-level EBIT outlook is also unchanged. (Jim Cramer’s Charitable Trust is long F. See here for a complete list of stocks.) 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The new Ford F-150 truck is unveiled at a gala event at the Ford Dearborn plant on April 11, 2024 in Dearborn, Michigan.Â

Bill Pugliano | Getty Images

Ford Motor On Wednesday evening it reported a bigger-than-expected profit in the first quarter, driven by strength in its commercial business. Positive updates to its full-year outlook helped send the stock rallying about 2.5% in after-hours trading.

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