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The past few years at Ford Motor Co. (NYSE: F) have been fraught with challenges, from battling mounting debt coupled with negative cash flow, to battling supply chain volatility, high commodity prices and weak cash flow. Equipment availability. As such, inventory faces a critical moment as it moves away from critical support.
This requires a closer look at the chronology of events that led to this situation to better explain the reasons why the company’s stock is still seriously 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, however, 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.
Answering questions about the projected $2 billion default, operational incidents, and potential responses in the first quarter of 2023, Lawler reviewed the key issues driving non-compliance, adding similar volume issues to key product and appliance issues with the rise of vendors.
Lawler went on to reassure investors that the company is actively addressing those issues by implementing corrective measures for chip entry, building larger pipelines from middlemen, and collaborating with supply chain partners to Tier 2 chip suppliers. Execute adjustments and gain better operational efficiencies and stabilize production to reduce accelerated costs.
Despite its efforts, the automaker continued to struggle in 2023.
On the third quarter 2023 earnings call, Lawler reported a strong first quarter with adjusted EBIT of $9. 4 billion; however, while it is on track to get a full-year guidance, uncertainties have arisen due to the United Auto Workers strike, which led to its withdrawal. The strike had an effect on third-quarter EBIT of $100 million and reduced the production plan by 80,000 units, which could have an effect on 2023 EBIT of $1. 3 billion.
Regardlesss, the company’s Ford+ plan and diversified portfolio exhibited resilience, with solid results from the Pro business and Ice and hybrid products offsetting electric vehicle investments. Quarterly revenue increased by 11%, reflecting a strong product lineup. However, flat wholesales resulted from supply constraints and a UAW work stoppage.
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. Over nine months, $4. 8 billion in adjusted loose money was generated, reaching 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.
Supply chain vulnerability was also highlighted, with disruptions expected due to shortages of key parts and critical raw materials such as semiconductors, lithium, cobalt, nickel, graphite, and manganese. Ford’s strategy of multi-year commitments for raw materials exposes it to risks such as fluctuating unpredictable raw curtain prices.
The difficulty of forecasting costs, as they should, 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 over the past few months, it has fallen below this point and now we can see that it is potentially attempting to check the point it was in the previous edition as it faces what appears to be the beginning of a bearish rejection of the $12. 30 Fibonacci zone, the undeniable 200-week moving average, and the 55-week exponential moving average. To the top, I think it’s possible that we’ll see Ford fall to the value point that aligns with the 0. 886 Fibonacci retracement, thus putting it at around $6. 50.
This article first appeared on GuruFocus.