Ford Is Showing A Lot Of Confidence - Here's How We Know

4 Nov 2021

Ford shares are continuing its recent sprint to the upside, after the company introduced what it called the North American auto industry’s first sustainable financing framework.

The company said, “the framework will cover a variety of both unsecured and securitization funding transactions, including ESG bonds issued by Ford and Ford Credit to finance environmental and social projects, and how Ford’s electrification and mobility projects will be evaluated and selected.”

Ford named four areas in which net proceeds from sustainable financing will be invested and expended. Ford’s framework will focus on clean transportation, clean manufacturing, making lives better, and community revitalization.

“Winning businesses are financially healthy and lead in sustainability – it’s not a choice, they rely on each other,” CFO John Lawler said in the press release. “We’re again putting our money where our mouth is, prioritizing and allocating capital to environmental and social initiatives that are good for people, good for the planet, and good for Ford.”

Separately, Ford announced this morning a cash tender off to repurchase up to $5 billion of the company’s higher-cost debt. The move will further de-risk the balance sheet and reduce the cash that goes out the door each year from interest expenses. The debt repayment should also help Ford’s credit rating get one step closer to returning to investment grade.

Bottom line:

Something to keep in mind is that Ford’s debt repurchase news follows the decision announced last week to reinstate the dividend. Ford paying a dividend and reducing its debt is a tremendous sign of confidence in free cash flow generation.

Portfolio Action:

Ford is trading above 19$, a level the stock has not been above since 2001. We continue to be impressed by the execution of CEO Jim Farley and on how they have balanced significant investments in Ford+, electric vehicles, batteries, and autonomous technology with shareholder returns and balance sheet optimization. However, with shares at elevated levels, and we're sitting on a ~43% gain, we have done some trimming. We sold another 15% of our position in Ford at an average price of 19.28$/share. 

Ford is now 12% of our portfolio. We will NOT be selling anything else, rather, will look to buy more on the downside when shares decide take a breather (stocks never go straight up). We would be buyers in the 17$, the 16$ and the 15$, and will buy them in increments, not all at once. Let's say we allocate 3000$ for this purpose: we will spend 1000$ to buy in the 17$, another 1000$ to buy in the 16$, and another 1000$ to buy in the 15$.