Analysis: F

Shares of Ford Motor (F)  are trading off Thursday, despite March-quarter results that beat top- and bottom-line expectations and saw the company reiterate its guidance for the coming year as well as establish multi-year targets for its shift toward electric vehicles. Despite the progress and return to profitability vs. the year-ago quarter, Ford shares have returned to levels they were at the beginning of last October. Some of the added pressure now is likely because of the initial March-quarter gross domestic product print that came in at -1.4% vs. the expected reading of 1.1%, raising concerns over the speed of the economy's growth and raising questions about who may be buying a new car, EV or otherwise, in the near-term?

The issue we have with the March-quarter GDP report is it simply conflicts with a number of other economic indicators, including manufacturing and services PMI data from both S&P Global and the Institute for Supply Management. While we've seen the economy contend with a number of headwinds, many of which we detailed in our comments earlier this morning, thus far the domestic and global economy continue to grow. Exiting last year, the average age of a car on the road in the U.S. was 12.1 years, while in Europe it was 11.5, which signals that we will see an eventual upgrade cycle above and beyond the adoption of EVs, which Ford is leaning into.

While the multi-year demand side keeps us long-term bullish, the continued progress on Ford's transformation keeps us long-term bullish on F shares, especially given the sharp retracement over the last three and a half months. Despite the sequential drop in wholesale units to 966,000 during the March quarter from 1.1 million in the December quarter, both Ford's adjusted earnings before interest and tax, and EBIT margin, ticked higher with its EBIT margin clocking in at 6.7%. That confirms the company continues to make progress on manufacturing and as it makes further progress, we should see those benefits translate into more favorable margins as auto and truck volumes rise.

Ford acknowledged that strong customer demand for its vehicles has been tempered by persistent supply chain issues, but noted that manufacturing rates were significantly improved during March, compared to January and February. Ford reaffirmed its 2022 adjusted EBIT guidance of $11.5 billion to $12.5 billion, which assumes improved semiconductor availability during the second half of the year, full-year vehicle wholesale volumes up 10%-15% year-over-year, and commodity costs up about $4 billion year-over-year. Clearly that forecast is tilted toward the second half of 2022, given the $2.3 billion in adjusted EBIT delivered during the March 2022 quarter. We see that as a byproduct of the company choosing to focus more on higher margin vehicles at the expense of market share -- in our book that points to a disciplined approach to maximize profits. In our experience choosing market share over profits tends to be a losing battle long-term.

In terms of the burgeoning EV business, Ford shared it is scaling EV capacity to meet demand for 600,000 units by late 2023, including that for its E-Transit vans in the U.S. and Europe, as well as the F-150 Lightning pickup in U.S. By the end of 2026, Ford targets producing more than 2 million EVs with EVs accounting for 50% of its global sales by 2030. While those may be viewed as lofty targets, they certainly track with any number of EV forecasts that we've seen.

F shares are back at their early October levels, despite the positive progress. From an AAP Portfolio perspective, we would love to be buying the shares here, especially given the strong technical support near $13.50, but the existing position size prevents us from doing so. As such, we will have to remain patient with the position and let the transformation continue to play out. During our last Members Only call, we commented that exiting F shares here would mean leaving all of the transformation benefits on the table.

We would encourage members, new and old, to use the current share price to average down their cost basis if they bought F shares at higher levels. If you have a position size that is less than that of the portfolio, this is a great spot to true up.

One thing to keep in mind is that corporate transformations are not measured in a few months or in a quarter or two. Waiting is frustrating for sure, but only when we look back over the course of multiple quarters do we see a clear picture of the progress. As we saw comparing Ford's EBIT margin in the March vs. December quarter, we are starting to see that picture emerge.

At the time of publication, AAP is long F.