Is Ford Stock Undervalued Ahead of Q3 Earnings?

Valued at $44.3 billion by market cap, legacy automaker Ford Motor Company (F) has been publicly traded since the 1950s. Today, Ford stock trades about 50% below all-time highs, underperforming the broader markets by a wide margin. 

Over the last 20 years, Ford stock has fallen 14.17%. Even if we adjust for dividend reinvestments, its cumulative gains are roughly 66%, compared to the S&P 500 Index's($SPX) returns of 676% in this period. 

Ford’s upcoming earnings report, set for release after the market closes on Monday, Oct. 28, will be a crucial short-term driver for the stock. So, let’s see what analysts expect from the automaker in the September quarter.

Can Ford Beat Estimates in Q3 of 2024?

Analysts tracking Ford expect sales to rise by 1.6% year over year to $41.88 billion, while adjusted earnings per share (EPS) is forecast to expand by 33.3% to $0.48 in Q3 of 2024. 

Recently, Ford reported its vehicle sales numbers for Q3, with 504,039 units sold compared to 500,504 units last year. This means Ford’s vehicle sales have risen by less than 1% year over year in Q3. 

In the same period last year, Ford reported a 7.7% year-over-year increase in vehicle sales. Notably, Ford is not the only auto manufacturer struggling with sluggish vehicle sales. For instance, Stellantis (STLA) reported a 20% decline in Q3 sales in the U.S. 

In the June quarter, Ford beat revenue estimates, but fell short of earnings expectations due to warranty costs. In 2023, Ford spent close to $5 billion on warranty repairs, and these costs rose by $800 million in Q2 compared to Q1 of 2024. Ford confirmed that customers have reported quality issues in vehicles manufactured before 2021. It will be interesting to see if Ford continues to wrestle with warranty costs in Q3. 

During its Q2 earnings call, Ford raised its full-year free cash flow guidance, while maintaining its earnings projections. It increased free cash flow estimates by $1 billion to between $7.5 billion and $8.5 billion. Given its midpoint guidance, the stock trades at a forward free cash flow of 5.5x, which is cheap. 

Management also forecasts adjusted EBIT (earnings before interest and taxes) between $10 billion and $12 billion for 2024. 

Despite these upbeat estimates, the stock tanked 18.4% on July 25, as traders reacted to the EPS miss and high warranty costs.

Ford’s EV Sales Will Be Under the Radar

In May 2021, Ford disclosed plans to accelerate its manufacturing capabilities for electric vehicles (EVs). However, in the last two years, slower consumer spending, inflation, and elevated interest rates impacted the company’s EV plans. 

Ford’s EV business lost $1.14 billion in the June quarter due to significant pricing pressures. Moreover, Ford competes with Tesla (TSLA) and a host of EV makers from China who benefit from cost advantages, economies of scale, and better battery technologies. Ford has since adjusted its product roadmap to limit EV losses in the next two years. 

Earlier this year, Ford disclosed plans to reduce EV-based capital expenditures to 30% from 40% as it pivots towards hybrid vehicles. It also scrapped plans for an all-electric SUV, and postponed the launch of a battery-powered pickup truck by 18 months, moving it to 2027. 

Is F Stock Undervalued?

Analysts tracking Ford expect to report adjusted EPS of $1.89 in 2024 and $1.85 in 2025, lower than $2.01 in 2023. Priced at six times forward earnings, F stock seems undervalued, given it also pays shareholders a forward yield of 5.5%. Considering its outstanding share count, Ford’s annual dividend expense amounts to $2.4 billion, indicating a payout ratio of 30%. 

Out of the 20 analysts covering Ford stock, six recommend “strong buy,” 11 recommend “hold,” and three recommend “strong sell,” for an overall “hold” consensus.

The average target price for F stock is $12.56, about 12.6% above the current trading price. 

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.