Ford (NYSE:F) simply introduced that it was as soon as once more elevating its electrical car costs attributable to larger materials prices and protracted provide shortages of crucial automobile elements. Ford already warned just a few weeks in the past that it’s dealing with larger materials prices, creating down-ward strain on the agency’s shares. Whereas Ford already stated that a few of its EBIT and revenues can be pushed into the fourth quarter attributable to provide shortages, larger electrical car costs might put customers, who’re already affected by excessive inflation, additional below strain. I don’t count on that Ford will change its FY 2022 outlook for EBIT and free money movement, however I imagine Ford’s earnings image will deteriorate drastically in FY 2023 and shares will not be a purchase earlier than Q3’22 earnings!
Ford is elevating EV costs once more, probably impacting demand scenario
In response to automobile journal “Automotive and Driver”, Ford is elevating costs for the brand new F-150 Lightning by $5,000 to account for larger materials costs which are the results of Covid-19 associated manufacturing shutdowns. Ford already warned of upper provider prices in September that are anticipated to be $1.0B above plan. As a consequence of these worth results, Ford has stated it expects Q3’22 EBIT of between $1.4B and $1.7B, implying a 58% quarter over quarter drop-off in adjusted earnings earlier than curiosity and taxes. Nonetheless, the automobile model confirmed its steering for FY 2022 adjusted EBIT of $11.5-$12.5B.
I imagine the rise in pricing might have a unfavorable demand impact as customers are more and more aware about inflation. With inflation already being a significant issue for lots of customers, a $5,000 worth enhance on a $46,974 electrical car is not only a small enhance. Though the ten% worth hike was doubtless vital for Ford to move larger prices on to prospects, larger costs might additionally end in cooling demand for the corporate’s flagship electrical car pick-up truck which is nearly to ramp up manufacturing. Ford clarified, nevertheless, that the value enhance will solely have an effect on new reservations and never current reservation holders.
Electrical car gross sales are surging
Ford noticed a 197% enhance in electrical car gross sales in September as a result of launch of recent EV fashions and accelerating product adoption. Ford bought 4,691 electrical automobiles final month which included 2,324 Mustang Mach-Es, the corporate’s top-selling electrical car SUV. Ford additionally raised costs for the Mustang Mach-E sport utility car in August, with costs going up $3,000 for the bottom mannequin and as much as $8,000 for the top-range GT with extended-driving vary. Mustang Mach-E gross sales have ramped up properly over final 12 months as nicely, rising 47.3% 12 months over 12 months in September. Ford stated that it had a 7% electrical car share final month and I estimate that Ford might obtain a ten% electrical car share by the top of FY 2023 if the corporate’s provide scenario improves.
Ford’s earnings in FY 2023 set for a contraction
I count on Ford’s steering for FY 2023 — which received’t be revealed till January — to be weaker than the steering for FY 2022. To recap, Ford expects $11.5B to $12.5B in adjusted EBIT this 12 months and between $5.5B to $6.5B in free money movement, however outcomes this 12 months are boosted by the discharge and manufacturing ramp of recent electrical car fashions just like the F-150 Lightning and the Maverick that are seeing rising buyer curiosity and powerful supplier turnarounds. The Ford Maverick pick-up truck had only a 6-day supplier turnaround in September. As a result of larger costs might postpone some patrons and provide chain issues are nonetheless a problem for Ford, I imagine margins are set to return below strain and earnings estimates for FY 2023 will proceed to pattern down. Based mostly off of earnings for FY 2023 ($1.94), the agency’s shares are valued at a P-E ratio of 6.3 X.
Dangers with Ford
The industrial dangers with Ford are apparent: the corporate was simply compelled to boost costs attributable to larger provider prices and a persistent provide scarcity of crucial elements that has its origin in COVID-19 manufacturing unit lockdowns. Provide shortages might translate to longer wait occasions for patrons whereas larger product pricing might sluggish Ford’s reservation development going ahead. Ford’s announcement of the F-150 Lightning worth enhance additionally implied that the availability chain scenario has not improved and that it isn’t anticipated to enhance any time quickly. For Ford, this might create issues in 2023.
There’s a variety of uncertainty now with Ford and buyers might not need to purchase the inventory till the corporate has defined how larger product pricing is affecting its demand scenario.
The surprising worth hike for the F-150 Lightning pick-up truck can be an admission that provide chain issues are right here to remain for the foreseeable future. With wait occasions additionally prone to enhance attributable to an ill-calibrated provide chain, I see rising dangers for Ford’s FY 2023 steering which I imagine will under-perform FY 2022 steering. Since Ford is valued cheaply primarily based off of earnings, I imagine it’s value maintaining the agency’s shares, however the threat profile is extra skewed to the down-side than in the beginning of the 12 months!