U.S. auto giant Ford is gearing up for a triumphant return to the Indian market after a two-year hiatus. In a strategic move, Ford is reviving its manufacturing facility in Tamil Nadu, with a keen focus on ramping up exports rather than targeting domestic sales. This decision is part of Ford’s larger “Ford+ Growth Plan,” highlighting its ambition for global market expansion. Tamil Nadu, a hub for automobile manufacturing, houses industry heavyweights like Hyundai, Nissan, Renault, VinFast, and Tata Motors’ Jaguar Land Rover division, all exploring the burgeoning electric vehicle (EV) segment.
Ford’s exit from India in 2021, after years of financial struggle despite a hefty $2 billion investment, laid the foundation for its current resurgence. The company’s re-entry is seen as a promising opportunity for Ford to leverage its global business network. Notably, Ford plans to create up to 3,000 new jobs in India over the next three years, signifying a commitment to long-term growth in the region.
Driving Factors for Ford Stock
Ford is pinning its future success on its commercial vehicle division, Ford Pro, which is experiencing a surge in demand. The introduction of the all-new Super Duty coupled with a robust order pipeline has prompted Ford to up its 2024 EBIT forecast for the Ford Pro unit to $9-$10 billion, highlighting the division’s growing significance. Ford Pro, encompassing vehicles, software, and physical services, is poised to contribute 20% of the company’s total EBIT by 2026. The software revenue from this division is forecasted to surpass $1 billion next year, boasting impressive gross margins exceeding 50%.
In Ford’s Blue segment, the iconic F-150, Maverick, Bronco, and Mustang models present substantial growth prospects. The rollout of new F-150, Ranger, Explorer, Expedition, and Navigator variants is expected to fuel revenue growth, with Ford projecting enhanced profitability in the latter half of 2024.
Despite initial challenges for the Ford Model e unit, the company is primed for long-term growth. Ford is focused on scaling up production, enhancing digital manufacturing efficiency, and vertical integration within the EV segment. The popular EV models like Mustang Mach-E and F-150 Lightning, alongside upcoming additions, are poised to bolster the company’s shipment numbers.
Ford’s robust liquidity position, with approximately $27 billion in cash reserves, enables sustained investment in its Ford+ strategy. Additionally, the company’s dividend yield exceeding 5% presents an attractive proposition for income-oriented investors. Ford has boosted its adjusted free cash flow projection for the year by $1 billion to a range of $7.5-$8.5 billion, underscoring its commitment to maximizing shareholder value.
Challenges Loom for Ford
While Ford’s push into electric vehicles holds promise for the future, it is expected to weigh on profits in the near term. The company anticipates a full-year loss ranging between $5 billion and $5.5 billion from the Model e unit, wider than the $4.7 billion loss recorded in 2023. Factors contributing to this scenario include pricing pressures and increased investments in next-generation EVs.
Furthermore, Ford’s escalating warranty and recall costs, totaling $2.3 billion in the second quarter of 2024, represent a growing concern. The company attributes most of these expenses to older models but is actively working on enhancing the quality of its newer offerings. However, it may take 12 to 18 months for these initiatives to yield cost-saving results, indicating that Ford could continue to grapple with elevated warranty expenses for some time.
The Zacks Consensus Estimate for Ford’s 2024 earnings per share (EPS) stands at $1.88, reflecting a 6.5% decline from the previous year. The consensus EPS estimate for 2024 has retreated by 14 cents over the last 60 days, signaling near-term headwinds for the company’s financial performance.
Ford Stock: A Bargain Buy?
From a valuation perspective, Ford’s current positioning appears attractive. With a forward sales multiple of 0.25, the company’s valuation is lower than both the industry average and its own five-year historical average. Ford boasts a Value Score of A, adding allure to prospective investors eyeing undervalued assets.
Analysts’ Outlook on Ford
Ford presently holds an average brokerage recommendation (ABR) of 2.60 on a scale of 1 to 5, where 1 signifies a Strong Buy and 5 indicates a Strong Sell. This ABR is derived from actual recommendations put forth by 20 brokerage firms. Among the 20 recommendations, 12 rate the stock as a Hold.
Should You Invest in Ford Shares Now?
With promising prospects, especially in the Ford Pro unit, a compelling dividend yield, and robust liquidity, Ford stands as a strong contender for long-term success in the auto sector. Anticipated interest rate reductions by the Fed could reignite consumer demand for big-ticket items, potentially benefiting Ford. Coupled with the stock’s appealing valuation metrics, the company’s outlook appears bright.
However, investors should remain cautious of short-term challenges looming over Ford. The company’s profit performance in 2024 is expected to take a hit from the Model e unit’s underperformance, while rising warranty costs pose an additional obstacle. Monitoring Ford’s efforts to enhance EV profitability and curtail warranty expenses will be crucial. While potential investors should weigh these factors before making investment decisions, existing shareholders are likely to reap the benefits of holding onto Ford stock for the long haul.