Portfolio holding Ford (F) on Tuesday showed investors it had righted the ship in the first quarter following a dismal end of 2022, easing our concerns that the legacy automaker had lost its way.

• Automotive revenue for the three months ended March 31 increased about 21% year-over-year, to $39.09 billion, topping analysts’ forecasts of $32.08 billion, according to estimates compiled by Refinitiv.

• Adjusted earnings-per-share (EPS) grew 66% on an annual basis, to 63 cents, exceeding estimates of 41 cents per share, Refinitiv data showed.

• Earnings before interest and taxes (EBIT) increased 45% from last year, to $3.38 billion, well ahead of analysts’ predictions for EBIT of $2.5 billion.

Summary

We are pleased to see Ford quickly bounce back from some of the self-inflected wounds that plagued the fourth quarter of last year, during which the company left about $2 billion of profits on the table. The CEO had promised investors to give him a second chance, and that's why the stock has been in the penalty box. But in the first quarter of this year, management demonstrated an ability to navigate what has become a trickier macroeconomic environment filled with uncertainties ranging from the availability of credit to a potential pricing war with electric-vehicle maker Tesla (TSLA), which has cut prices several times this year. Though, Ford CEO Jim Farley made it clear Tuesday that he would not price his electric vehicles purely to gain market share. He’s focused on a roadmap of profitable growth and taking internal costs down.

Ford shares are trading roughly 2% higher this morning. With execution improving and our patience paid for through the roughly 5% dividend yield, we are sticking by Ford.

Quarterly commentary

Ford Blue, which represents Ford’s gas-powered and hybrid vehicles, delivered a strong quarter and was profitable in every region in which it operates. Profits nearly doubled to $2.6 billion and margins expanded to 10.4%, a result of higher volumes and a favorable mix of highly profitable vehicles like the F-150.

Ford Model e, the electric vehicle division, saw its revenues decline from last year due to lower volumes and shipments, which were down on production interruptions for the Mustang Mach-E and the F-150 Lightning. The Mach-E downtime was scheduled, as part of management’s plan to nearly double manufacturing capacity. However, the F-150 Lightning pickup production issues were unexpected. The company had to address a battery issue, which has since been fixed. This EV division, which management is quick to remind operates like a startup, lost roughly $300 million more in EBIT compared to last year. That was mainly a result of higher engineering costs and commodities prices, along with other inflationary pressures. Despite the challenges in the quarter, profitability is expected to strengthen over time thanks to volume-driven operating leverage, improvements in design and efficiency and lower battery costs. Management continues to believe its first-generation products will be EBIT margin-positive by the end of next year.

Ford Pro, the unit that houses the company’s commercial vehicles, as well as its software and services business, saw its EBIT nearly triple. The jump in profitably was supported by higher net pricing, increased volumes and a favorable mix of sales. Management called out a 64% increase in paid-software subscriptions, including higher revenue-per-unit software sales. Subscription software has become a major focus for automakers, as their recurring revenues help decrease the cyclicality of a traditional automotive business.

Guidance

Ford reaffirmed its outlook for the full-year 2023, expecting total adjusted EBIT to be in the range of $9 billion to $11 billion, while adjusted free cash flow should come in at $6 billion. Ford expects Ford Blue to deliver full year EBIT of about $7 billion, Ford Model e to report a loss of around $3 billion, and Ford Pro’s EBIT to be around $6 billion.

Given the size of today’s beats, some investors might be disappointed that Ford did not raise its full-year outlook, especially when compared to General Motors (GM), which raised its full-year guidance last week after a stronger-than-expected quarter. Even so, current full-year 2023 adjusted EBIT and free-cash-flow estimates are $8.18 billion and $2.47 billion, respectively. And with the sell-side analyst estimates so far below management’s range, earnings estimates may move higher this week.