Cristi Croitoru
Ford’s Unpleasant Plight
Here we go again. Ford Motor Company (NYSE:F) CEO Jim Farley has had to eat his words once again. During the latest earnings report and Q2 conference call, Farley substantially pushed back expectations regarding the production levels of Electric Vehicles, or EVs. What’s more, EV sales have been less than stellar. Finally, let’s not forget the fact Ford is in the midst of negotiations with the United Auto Workers Union, the UAW. All this adds up to one big quagmire. The “pièce de résistance,” as they say in France, (I consulted in France for a couple of years), is the fact that Farley maintains Ford will still hit their 8% margin targets regardless.
To me, this doesn’t sound like a recipe for a great investment. In the following sections, I will make my case. Let’s get started.
Farley pushes back EV Production targets
According to a recent Seeking Alpha News report, Farley pushed back the production target by an entire year:
“The automaker now expects a 600,000 run rate for 2024, which was originally set to occur this year.”
As I stated in a previous article, this was exactly what I expected to happen.
“In addition to Ford launching into an entirely new line of business, Ford has also just performed a complete reorganization of their corporate structure. The fact of the matter is the company was in dire need of a reorg, that is for sure. Even so, oftentimes when you do perform these types of processes you tend to uncover additional hidden costs that you had not anticipated in the first place. What’s more, you inevitably run into issues with the timeline and have to push out target dates due to unexpected delays. This costs you time and money.
If Ford has to push out target dates and lower profitability expectations due to unforeseen issues arising, I don’t see Wall Street analysts or shareholders giving them much quarter.”
The problem is, Farley can’t help himself. I used to admire his bold confidence. I was a believer right up until the first time he failed to come through several quarters ago. He stated they left “$2 billion on the table” when they missed on earnings, and that opened my eyes.
Seeking Alpha asked me to be the lead Analyst covering Ford’s recent investor day. This was where they first laid out all their grand plans for the future. EVs were going to be a major part of it. When asked what I thought the risks were to the plan, I stated Ford was trying to do too much too soon. The budget and timeline were at risk of falling short.
That appears to be exactly what’s happening now. The other issue with this kind of “overpromise and under-deliver” rhetoric is the fact it gets unknowing market participants all twisted up with excitement. A buying frenzy ensues and the stock shoots up parabolically. Which, once again, is exactly what happened.
Ford short-term chart
Finviz
The rapid parabolic rise is a massive red flag indicating the current gains are most likely not going to last. I warned investors about this phenomenon as well when, in a previous Ford article, I stated:
“One thing I’ve learned over the years is that, when it comes to stock gains, it’s usually an “easy come, easy go” type scenario. The fact Ford’s stock ran up 37% in such a short time usually means those gains are subject to being given back just as quickly. I like to see a slow and steady rise to new highs, not a parabolic spike like what is shown above.
What this portends to me is the gains are driven by “hot” money. What I mean by this is, the rally is most likely driven by short-term traders looking to profit on the momentum. What’s more, as my father always said, “You have to take profits to make profits.”
Ford stock is down 6% since the time of that writing and 11% for the month. I see another 17% near-term downside in Ford stock. My prediction is the stock will quickly crater back down to major support at the $11 mark.
Nonetheless, I would still not be a buyer at this point in time. This is due to the fact that I see Ford as dead money walking at this point. Farley and company are in over their heads. Sucking up to Tesla, Inc. CEO Elon Musk isn’t going to solve all Ford’s problems. On top of all this, Ford is, as I said, in the middle of difficult negotiations with the UAW.
Potential UAW strike would spell disaster
Now, don’t get me wrong, I am not saying there will be a UAW strike. I am saying that if there was, it would definitely throw a huge monkey wrench into Ford’s aggressive plans for the future. The linchpin is, the current setup provides the UAW with substantial bargaining power presently in my estimation.
Here is what Farley had to say about the ongoing negotiations on the recent conference call. Farley stated during the call:
“To wrap up, there is understandably a lot in the interest in the UAW contract discussions that began two weeks ago. We won’t negotiate in public, but I would like to share our general approach and our belief system. When it comes to building in America and partnering with UAW, Ford stands apart from all the other automakers, and most other major industrial companies. We believe, as Sean and Chuck do, that Ford should do our part to support the middle class, create vibrant communities and build a strong American industrial base.”
Farley doesn’t sound like he is heading into the talks looking to hold the line at all. What I glean from the tone of his statement is Farley knows they have him over a barrel, so to speak. Best case scenario is Ford ends up having higher expenses related to the workers across the board. That’s another nail in the maker of the Model T’s “margin” coffin.
The truly mind-boggling aspect of this entire Ford fiasco is the fact that CEO Farley and CFO John Lawler have held the line stating they will still reach their 8% margin goal.
8% margin target maintained
CEO Farley and CFO Lawler both held their ground despite all the recent headwinds regarding their 8% margin targets. According to another Seeking Alpha news article, they stated:
“Ford (Chief Financial Officer John Lawler said the company’s guidance reflects “headwinds, which include continued global economic uncertainty and inflationary pressures, higher industry-wide customer incentives and continued EV pricing pressure, increased warranty costs, lower past service exchange and costs associated with union agreements.”
Farley assured investors that the company’s strategy is not to build “compliant” vehicles that are “very affordable for acquisition cost but lose lots of money.”
“Our strategy is to make 8% margin regardless of the price point, and we’re going to allocate capital along those lines,” Farley said.”
This confidence in the margin target of 8% is astonishing to me. If it was me, I’d give myself a bit of cushion by at least providing a few caveats to my stated goals. This leads me to believe the 8% margin target may be the next shoe to drop in this comedy of errors we have witnessed to date. Not to mention that, just as I am writing this very line, news just broke Ford has had a major recall of the internal combustion engine (“ICE”) F150s. According to CBS News:
“Ford Motor has recalled about 870,000 F-150 pickup trucks because of a faulty parking brake that could turn on by itself, causing the driver to lose control.”
This obviously is not going to do any favors to Ford’s bottom line. On that note, let’s “bottom line” this piece.
The Bottom Line
I think Ford has bitten off more than they can chew. We haven’t heard the last of CEO Farley’s recantations. I suspect the next disastrous domino to fall will be Farley’s abandonment of the 8% margin target. This will truly be the straw that breaks the “proverbial” camel’s back. The really frightening fact if this happens, is now the 4% dividend payout becomes at risk. Don’t forget Ford suspended the dividend once before when their well thought out plans went awry.
I see Ford stock heading lower in the coming months. My 12 month price target is $11, this implies 17% downside from current levels. Even if it does get to this level, I would not be a buyer. We haven’t even touched on the tenacious competitive landscape that is driving EV vehicles prices lower by the day.
It seems as though it may have become a race to the bottom at this point. And let me tell you, when that happens in an industry, nobody wins, especially the shareholders. Ford stock is a no-touch in my book until further notice.
Those are my thoughts on the matter. I look forward to reading yours.
