Ford Motor: The Quiet Before The Storm

A new batch of earnings for car companies is just days away and I have initiated a speculative long position before Ford Motor Co. () is going to release its quarterly earnings next week.

There a number of good reasons why, I think, the opening of a speculative long position could make sense for investors: Ford experiences solid earnings momentum, which caused the car company to raise its EBIT outlook for 2023 in the second quarter, and I would think that Ford Motor and the United Auto Workers union will be able to come to an agreement moving forward.

With demand for new autos likely staying strong in 3Q-23 and inflation being less of a challenge than it was a year ago, I think that the risk/reward relationship has substantially improved for Ford Motor before the third quarter earnings. The chart picture also suggests that Ford's stock is gathering strength for a potential breakout.

Plus, a low earnings multiple and a gradually improving earnings situation in the EV division, are two additional reasons why investors might want to give Ford Motor a chance.

My Rating History

Last year, in September 2022, I argued in Ford Motor: Game Changer that inflation and higher supplier costs posed an earnings challenge for Ford Motor and concluded that cost-sensitive automakers had unattractive risk/reward relationships.

With inflation retreating, compared to last year's record inflation rates, however, profit headwinds have subsided, and Ford Motor substantially raised its EBIT forecast for 2023 due to ongoing earnings momentum.

I think that the present consolidation provides an entry opportunity for investors and I also think that earnings and delivery momentum could lead to beat-and-raise scenario next week when Ford Motor's earnings are due.

Earnings Estimates For 3Q-23

According to Tipranks, the market models $0.47 per share in profits for Ford Motor's third quarter. A year ago, in 3Q-22, Ford Motor made a $0.30 per share profit, but the company's financial results were weighed down by high supplier costs. The earnings-beat history for Ford Motor is not conclusive and the company has both beat and failed to beat consensus estimates in the last two years.

The Quiet Before The Storm: Technical Analysis

Technically speaking, Ford Motor is sitting at a crossroads. The stock price has recently fallen through both the 200-day and 50-day moving average lines, but Ford Motor now appears to have stabilized at a support level around $11.75.

Ford Motor is not oversold, based on the Relative Strength Index, but the technical chart picture looks as if Ford Motor is gathering strength before a potential significant breakout to the upside which could happen if Ford Motor beats expectations and potentially raises its guidance.

Ford Is Heading Into The 3Q-23 Release With Earnings Momentum

Earnings momentum points in the right direction for Ford Motor before quarterly earnings are going to be scheduled to be released on October 26, 2023. Ford Motor raised its EBIT forecast from $10.4 billion to $11-12 billion in the second quarter due to earnings growth and robust demand for both the company's EVs and non-EVs.

Inflation has fallen substantially in the last year which should have cleared the way for incremental earnings growth in the third quarter. Where I see potential for better results is in the EV division which is seeing robust demand as well.

Ford Motor stated in its second quarter earnings release that losses in the electric-vehicle division are widening and are set to be ~$4.5 billion in 2023.

Ford Motor has gone full in on EVs and a more granular guidance about when the company expects its EV division to be profitable could remove a lot of uncertainty that has weighed on the stock since July. Since demand for Ford Motor's EVs is strong, including the Lightning truck, I think that the company could deliver a couple of surprises next week.

Cheap Earnings Multiple

The market models $2.09 per share in profits for Ford Motor in the present year and a YoY drop to $1.84 per share in 2024. With $1.84 per share in profits expected next year, Ford Motor is selling at an implied P/E ratio of 6.4x.

The 2024 profit estimate for General Motors Company (GM) is $6.94 per share which translates into a P/E ratio of 4.2x. Both companies are probably this cheap as the market expects a cyclical profit decline for the consumer spending-sensitive auto industry during the next recession.

With that said, Ford Motor's valuation multiple, taking into account the company's solid EBIT guidance for 2023, contains a rather large margin of safety, in my view, and so does General Motors' valuation multiple.

Why Ford Motor Could See A Higher/Lower Valuation Multiple

It all comes down to demand and Ford Motor's ability to constrain cost increases for input materials. Inflation has come down a lot since last year, but saw a flare-up in the third quarter. While cost pressures have eased, inflation might become a problem again.

Ford Motor is presently suffering from labor strikes which may have added to uncertainty for the stock price. Ford Motor's management and United Auto Workers union leaders are still in negotiations and I think that a solution will sooner or later be found that allows for a normalization of production. As strikes are costly, I think that a resolution to the stand-off could be yet another stock catalyst for Ford Motor.

My Conclusion

Though I haven't been much of a fan of Ford Motor in the past, primarily because of inflation headwinds that weighed on the company's cost structure last year, I have come around and see upside potential prior to next week's earnings release.

Ford Motor guided for an adjusted EBIT upswing in 2Q-23 due to robust EV and non-EV demand and this demand likely persisted in 3Q-23.

A subsequent beat-and-raise next week could catalyze a new upside move for the stock and also draw those investors back to Ford Motor that have stayed on the sidelines following the company's massive consolidation in July and August.

Strike resolution agreements, ongoing earnings momentum on delivery strength and a guidance bump are three things that I am going to be looking forward to next week. Buy.