Analysis: F

Ford (F) after the bell on Thursday reported better-than-expected results for the fourth quarter. Revenue of $36 billion (-9% YoY) topped estimates of $33.89 billion, and adjusted earnings per share of $0.34 (+$0.22 YoY) exceeded estimates of a loss of $0.07.

In addition to the headline results, adjusted earnings before interest and taxes was $1.7 billion (+$1.2 billion YoY), well ahead of the $230 million consensus, at an adjusted EBIT margin of 4.6% (+3.6 percentage points YoY). Adjusted free cash flow was also much better than expected at $1.9 billion with a consensus sitting at $159 million. 

"The transformation of Ford is happening and so is our leadership of the EV revolution and development of autonomous driving," Ford president and CEO Jim Farley said in the release. "We're now allocating a combined $29 billion in capital and tremendous talent to these two areas, and bringing customers high-volume, connected electric SUVs, commercial vans and pickup trucks." 

By region, revenues from North America were $22.0 billion, generating $1.074 billion of EBIT -- well above estimates of $401 million -- for an EBIT margin of 4.9%. Driving the 53% YoY increase in EBIT was yield management and the non-recurrence of 2019 UAW contract costs, partially offset by planned lower volumes from the all new F-150 changeover. Management said its North America portfolio transformation is near complete with 97% of mix from trucks, vans and utilities.

Europe's revenues were $7.1 billion, generating $414 million of EBIT -- also well above estimates of a $223 million loss -- for an EBIT margin of 5.8%. This was the highest quarterly profit in the region in more than four years, as all three business focus areas (commercial, passenger and import) were profitable. Profitability is improving here through restructuring efforts, and Ford said its first phase of restructuring has reduced its annual structure costs by $1.1 billion.

Revenues from China were $0.8 billion, generating a $66 million loss before interest and taxes and -- slightly worse than estimates of -$38 million -- for an EBIT margin of -8.3%. What's notable here is that retail sales increased 30%, outpacing the overall industry as Ford enjoyed its fourth straight quarter of share growth, thanks to the popularity of locally produced versions of the Lincoln Corsair and Aviator. And, even though the loss before interest and taxes was worse than expected, the result represented the third consecutive quarter of year-over-year profitability improvement.

South America's revenues were $0.9 billion, generating a $105 million loss before interest and taxes, which was roughly in line with -$101 million estimates -- for an EBIT margin of -12.2%. This was the fifth consecutive quarter of YoY EBIT improvement. It's striking how poorly this region was run under previous management, losing more than $4.5 billion over the last decade. Farley said on the earnings call that this was "not acceptable."

Changes have been made, and we remind you that in mid-January, Ford announced a major new restructuring for South America and closed three facilities to position the region into a leaner, asset-light business model.

International Markets Group revenues were $2.5 billion, generating a loss of $62 million before taxes and interest -- slightly better than estimates of -$70 million -- for an EBIT margin of -2.5%. If India were excluded, Ford would have been profitable in the quarter with pronounced strength in Australia and Vietnam. Still, the $62 million represented a significant improvement from the $174 million loss last year.

Lastly, in Ford Credit, EBIT came in at $912 million, representing growth of 48% that topped expectations of $662 million.

In addition to the better-than-feared results, Ford shared some excellent news regarding their electric and autonomous ambitions. Ford now plans to invest at least $22 billion in electrification through 2025, roughly twice what the company had previously committed to.

Ford is "all in and will not cede ground to anyone," said Farley in release, in developing connected electric vehicles and services in the vehicles that Ford makes best: pickups, commercial vans, and SUVs. Separate from the EV investment is Ford's new plan to invest about $7 billion on autonomous vehicles over 10 years through 2025. This figure includes the $2 billion that was spent through 2020, so basically $5 billion going forward.

 "We are accelerating all our plans -- breaking constraints, increasing battery capacity, improving costs and getting more electric vehicles into our product cycle plan," Farley said in the release. "People are responding to what Ford is doing today, not someday."

The company noted how the Mustang Mach-E has received great customer and critical reviews, and even an analyst on the earnings call said that, "this thing is going to sell super fast, so Bravo to the team."

What's next in the EV pipeline is the first E-Transit commercial van in late 2021, an all-electric F-150 pickup in mid 2022. And the Lincoln luxury brand will be part of the EV lineup in the future.

What will help Ford accelerate its transformation to enhance the connected car experience is the new, six-year partnership with Google that was announced earlier this week that you can read about here.

As for the outlook, management said Ford was on pace to earn $8 billion to $9 billion in adjusted EBIT (including a $900 million on cash gain on its investment in Rivian) and generate $3.5 billion to $4.5 billion in adjusted free cash flow in 2021. Backing out the Rivian gain, Ford's EBIT outlook is much stronger than the roughly $6.75 billion consensus estimate.

Take the outlook with a grain of salt, however, because the global semiconductor shortage, which has impacted multiple industries including autos, has created uncertainty and will impact Ford's 2021 operating results. Management said it is "premature" to try to predict what availability will mean for full year performance and that estimates from supplies suggest losing 10% to 20% of planned first quarter product. As to what it means for Ford's forecast, if the chip shortages extend through the first half of the year, Ford's 2021 adjusted EBIT outlook could be impacted by $1 billion to $2.5 billion, net of some offsets in cost and volume make ups. Although the news does not come as a surprise because what is happening in the chip industry is well document by now, this potential hit to EBIT is significant and we could see Ford's stock trade lower tomorrow.

Longer term, CFO John Lawler said in the press release that Ford's third and fourth quarters were evidence of the progress made to turn around the company and improve profitability. Of their financial objectives, one target is an 8% company adjusted EBIT margin, with 10% in North America and 6% in Europe with all regions profitable. We think that if you look at the actions that are being made and the progress that has already been achieved, we believe Ford will be successful on delivering this goal even as they continue to invest in their EV future. 

Overall, this was a very strong quarter for Ford and was highlighted by profitability that came in much stronger than expected and the news that management doubled down on its investment in electrification and autonomous capabilities. The only real issue we see here is more of a near-term concern related to the chip shortage that is impacting auto original equipment manufacturers around the globe. But longer term and as evidenced by the quarter, Ford is doing exactly what you want to see in terms of steadily improving profitability in each region, and the stepping up of investment in electrification and autonomous capabilities, this latter part being so important to the stock's multiple because EVs are the future and the market is ascribing less and less value to ICE vehicles each year.

Shares are up slightly in after-hours trading largely due to excitement around the EV/autonomous commitment, but if concerns over the chip shortage take the stock down tomorrow we would view that pullback as a buying opportunity.

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long F.