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The past few years at Ford Motor Co. (NYSE: F) have been fraught with challenges, from battling mounting debt along with negative losses to battling supply chain volatility. As such, the name is facing a critical moment as it moves away from critical support.
This calls for a closer examination of the timeline of events that got it here in order to better present the reasons why I believe the shares of the company are still severely overvalued.
Warning! GuruFocus detected 3 bookings with F.
During the fourth quarter 2022 earnings call, CFO John Lawler outlined the former automaker’s strategy to distribute 40% to 50% of loose cash flow, in line with the focus on overall return for shareholders. While it reached $10. 4 billion in adjusted earnings before interest and taxes. In 2022, this figure is specifically below the target of between $11. 5 billion and $12. 5 billion that the company had set in its guidance for the year, as demanding supply chain conditions and production plans affected results. .
Lawler went on to acknowledge that with greater control of controllable factors, Ford could have generated up to $2 billion more in adjusted EBIT, but particularly due to origin chain instability and production plan disruptions, it produced lower-than-expected volumes. along with an increase in prices due to freight premiums and supplier fees during the quarter.
Responding to questions about the $2 billion guidance miss, operational mishaps and potential solutions in the first quarter of 2023, Lawler went over the key issues that caused the miss, which included volume challenges related to key commodities and equipment issues with suppliers during ramp-up.
Lawler then assured investors that the company was actively addressing these issues by implementing corrective actions for chip inflow, establishing better pipelines from brokers and collaborating closely with supply chain partners down to Tier 2 chip suppliers Mainly, the focus was on executing changes, improving operational efficiency and stabilizing production to reduce expedited costs.
Despite its efforts, the automaker continued to struggle in 2023.
During the third-quarter 2023 earnings call, Lawler reported a strong first three quarters with $9.4 billion in adjusted EBIT, but despite being on track for full-year guidance, uncertainties arose due to the United Automobile Workers strike, leading to its withdrawal. The strike impacted third-quarter Ebit by $100 million and reduced the production plan by 80,000 units, potentially impacting 2023 Ebit by $1.3 billion.
Regardless, Ford’s plan and diversified portfolio have shown resilience, with strong effects from the Pro business and Ice and hybrid products offsetting EV investments. Quarterly earnings were up 11%, reflecting a strong product mix. However, wholesale sales stalled due to limitations and a work stoppage across the UAW.
Adjusted EBIT of $2. 2 billion, which looks like a year-over-year improvement. Costs have risen, highlighting the need for continued efforts, especially in terms of warranty expenses and curtain costs.
Adjusted loose money was $1. 2 billion, down 66. 66% year-over-year. In nine months, $4. 8 billion of adjusted loose money was generated, achieving the target conversion rate of 51%.
Ford ended the quarter with more than $29 billion in cash and $50 billion in cash, adding a new $4 billion contingent liquidity facility. However, this figure is still lower than in previous years:
Source: macrotrends. net
Concerns were further highlighted towards the end of the earnings presentation, where a cautionary note was presented highlighting potential challenging situations in access to credit and debt, highlighting risks such as credit rating downgrades, market volatility and regulatory factors. In addition, he also expressed concerns about maintaining a competitive job structure, adding limitations to hard work.
The vulnerability of the supply chain was also emphasized, with disruptions anticipated due to shortages of key components and essential raw materials like semiconductors, lithium, cobalt, nickel, graphite and manganese. Ford’s strategy of multiyear commitments for raw materials exposes it to risks associated with fluctuating demand and unpredictable commodity prices.
The difficulty of forecasting costs is recognized, especially in the face of volatile commodity prices. Therefore, it is very vital that Ford tries to cope with those demanding situations in order to maintain its competitive position.
There are also some monetary signs that I think are troubling, starting with Ford’s ability to pay off its debt in the short term. Year after year and quarter after quarter, Ford has said it has overall debt that far exceeds its total existing assets. In my view, this indicates many solvency hazards when it comes to assessing the company’s ability to cover its short-term obligations in an environment of higher yields, higher interest rates, and tighter credit situations in which the market is already discovered.
Source: tradingview. com
Ford has also been hit hard by recent inflation, as its operating expenses increased from $131. 19 billion in the first quarter of 2022 to $166. 96 billion in the third quarter of 2023, a 35. 77% increase in just under two years:
Source: macrotrends. net
In addition to rising operating expenses, the company experienced a sharp drop in net income, which fell from a high of $17.94 billion in the fourth quarter of 2021 to the low of -$1.98 billion at the end of 2022.
Source: macrotrends. net
The sharp increase in operating expenses, coupled with the sharp drop in net income, was attributed to a prolonged era of declining loose money. This resulted in annual loose money turning negative for the first time in 2022.
Source: tradingview. com
Finally, Ford’s debt-to-EBITDA ratio is exponentially higher than that of more than 90% of its competitors. This ratio is a measure of a company’s debt, indicating the amount of its debt relative to its earnings. A higher ratio suggests a higher monetary level of leverage and therefore a greater threat of not being able to meet obligations in a timely manner. This higher ratio raises considerations about increased threats of insolvency to the company.
Source: tradingview. com
Over the past few years of structural and monetary stress, Ford has managed to stay above the 61. 8% Fibonacci at $12. 30. But in recent months it has fallen below this point and now we can see it potentially attempting to confirm the point it was in the previous edition as it faces what appears to be the beginning of a bearish rejection of the Fibonacci zone. at $12. 30. Organize the undeniable 200-week moving average and the 55-week exponential moving average. If we manage to hold firm, I think we could see Ford drop to the value point aligned with the 0. 886 Fibonacci retracement, placing it at around $6. 50.
This article was first published on GuruFocus.