Ford Delivers Another Plus Quarter, Raises Guidance, Resumes Dividend 

Mike Le_27 Oct 2021

Summary

Ford (F) reported better-than-expected third-quarter results Wednesday after the closing bell. Revenues of $35.7 billion exceeded estimates of $32.54 billion. Adjusted earnings per share of $0.45 (compared to 0.48 YoY) was another pleasant surprise compared to estimates of $0.27. Adjusted earnings before interest and taxes (EBIT) for Q3 was $3 billion, an eyebrow-raising number when compared to Q2 EBIT of 1.1 billion. 

Ford increased guidance for full-year 2021 adjusted EBIT to be between 10.5 billion and 11.5 billion. This was compared to their prior guidance of 9 - 10 billion.

Ford’s board of directors voted to reinstate a regular quarterly dividend starting in Q4. The fourth-quarter dividend of 10 cents per share will be paid on Dec. 1 to shareholders of record at the close of business on Nov. 19. 

President and CEO Jim Farley said in the press release: "This is the most exciting Ford lineup I’ve seen, but what matters is that customers love our new products and services – and we’re just getting started,” said President and CEO Jim Farley. “The trajectory of our business gives us huge confidence in Ford+, and we’re obsessively turning the plan’s promise into reality.” 

Metrics By Region

North American revenue was $24.0 billion (-5% YoY), generating $2.4 billion of EBIT -- for an EBIT margin of 10.1%. Improvements in semiconductor supplies helped lift product shipments 67% from Q2. 

Europe's revenue was $6.1 billion (+7% YoY), generating a EBIT loss of $52 million -- for an EBIT margin of -0.9%. EBIT improved on a QoQ basis, highlighting the progress towards a 6% EBIT margin by 2023.

China's revenue was $0.6 billion (-41% YoY), which in turn generated a $39 million loss before interest and taxes, and for an EBIT margin of -6.6%. Revenue was unchanged compared to Q2, but EBIT and EBIT margin was significantly improved. The company is progressing with its own turnaround in China. Retail sales of the luxury Lincoln-brand vehicles were up 24% year-over-year. During the quarter, the company opened the first of a series of direct-to-customer Ford Select city stores to focus on growing demand for BEVs in China. Last week, Ford began local production of its all-electric Mustang Mach-E in Chongqing. 

South America's revenue was $0.6 billion (-1% YoY), generating a $2 million EBI, for an EBIT margin of 0.3%. This was the eight consecutive quarter of YoY EBIT improvement, as the business approaches a break-even run rate 

International Markets Group revenue was $1.9 billion, generating earnings of $125 million before taxes and interest, for an EBIT margin of 6.6%. This was worse than Q2 2021. Management restructured its India unit in September, which we wrote about here.

Lastly, Ford Credit EBIT came in at $1.1 billion, compared to 1.6 billion in Q2 2021.

Continued Investment in Ford+

According to CFO John Lawler, the company expects to invest $40 billion to $45 billion in strategic capital expenditures between 2020 and 2025 – including one-half of the more than $30 billion it plans to devote exclusively to BEVs during that same period. This is consistent with what they promised during their Delivering Ford+ Event back in May, to invest 30+ billion by 2025.

Resuming Quaterly Dividend

In other news that income hungry shareholders will appreciate, Ford announced this evening that its board of directors has voted to reinstate a regular quarterly dividend starting in the fourth quarter. The fourth-quarter dividend of 10 cents per share will be paid on December 1st to shareholders of record at the close on November 19th. Based on today’s closing price, the implied dividend yield on Ford is about 2.58%.

Ford reinstating its dividend is a fantastic sign of confidence in the business and free cash flow generation. It’s also impressive to see the company balance continued investments in Ford+, electric vehicles, batteries, and autonomous technology with shareholder returns. In other words, don’t expect the dividend payment to slow down investments for the future. 

Guidance

Now let's talk about the company's full year outlook. Ford raised its expectations for full year adjusted EBIT by about $1.5 billion compared to what they guided last Q, moving the new range to between $10.5 billion and $11.5 billion. This does not include potential investment gains from the Rivian IPO. Ford expects increase in wholesale shipments for the remaining quarter of this year.

There is no change to Ford's FY 2021 adjusted free cash flow of 4.0 to 5.0 billion. This is a significant plus, compared to General Motors, which forecasted reduced FCF and shares got dinged by about 5% on Wednesday.

Ford's management doesn't provide 2022 guidance at this point. CFO mentions ambiguities include semiconductor shortage, inflationary pressure from materials and freights (for example, commodity costs are expected to be up $3 billion to $3.5 billion for full-year 2021, and could increase another $1.5 billion in 2022)

“What’s certain is that we’re going to keep investing smartly and heavily in Ford+ – customer facing technology and always-on relationships, connectivity, and EVs – on top of a foundation that’s broad and deep,” said CFO John Lawler. “We believe the long-term value creation from these investments will be substantial.” 

Ford plans to provide financial guidance for 2022 when it reports fourth-quarter and full-year 2021 financial results on Feb. 3 

Misc

As for some other items of note, CFO John Lawler said on the call that its battery-electric vehicle lineup has three “hits” on its hands. We are talking about the already EBIT profitable Mach-E with 200,000 units of demand, the over 160,000 orders for the Lightning, and a completely sold-out E-Transit. Management also spoke about their transition to an order bank model in North America. Farley said the changes to order bank “allows us to push simplification into the order, the customer-facing options, which we need to do, and it reduces cost and improves out quality.” Order banks also eliminate the need for expensive conquest fixed marketing.

Thoughts on the stock

As a result of the better than expected quarter and raised outlook, Ford's shares are trading up ~9% in after-hours trading (16.90$ compared to 15.50$ at the close). This move was started after the numbers were released, but was bolstered during the conference call with CEO Jim Farley. This brings shares to a new 52-week high. In the past 2 weeks, many analysts have raised Ford's price targets, indicating they knew something good was going to happen. Expectations going into the print were high, the company delivered, and this must have been an incredible surprise for the stock to make 52-week high during after-hours. We expect analysts to raise their price targets tomorrow morning, and when that happens, we expect the shares to trade up to 18$ by end of year. 

We may have trimmed our position in Ford prior to this print, but that sale was made purely from a portfolio management standpoint. Think of it like this: when the largest position in a portfolio has been such an outperformer year to date, as is the case of Ford (+22% at the time of sale), the prudent thing to do is to right-size the position. Now that our position has been right-sized, we can let the stock run and watch Ford's incredible electric vehicle and profitability transformation unfold.

Why is tonight’s beat from Ford generating a positive reaction in the stock price, while GM shares fell today despite its better-than-expected report?

There are a few reasons:

• First off, GM may have beat expectations and said its full-year adjusted EBIT will be at the high end of its guidance range, however, the lack of real change to the full-year outlook meant analysts could keep their estimates as is. This is a huge difference from Ford, which not only beat expectations in the quarter but also raised its full-year outlook well above consensus estimates. GM only did the numbers while Ford issued a true beat and raise.

• Second, Ford differentiated itself from a shareholder return perspective tonight by reinstating its quarterly dividend. Think of it this way: If you are an investor looking to put money to work in an electric vehicle play, but at the same time you like stocks that pay dividends, then you have to put Ford on your radar after tonight's announcement.