Tariff Uncertainty And Dealer Inventories Will Cripple Profitability

Key Takeaways

• Ford faces pricing pressure and inventory challenges in the pickup truck segment, potentially affecting revenues and margins.
  
• Cost reduction plans may struggle against tariff uncertainties and raw material fluctuations, impacting profitability.
  
• Ford's record revenue, strong market position, expanding software services, cost reductions, and diversification in hybrid trucks signal potential for increased profitability and market share.

Catalysts

Develops, delivers, and services Ford trucks, sport utility vehicles, commercial vans and cars, and Lincoln luxury vehicles worldwide.

• Investors might be concerned about Ford's ability to manage pricing pressure due to increasing competition and higher dealer inventories, especially in the pickup truck segment, which could result in declining revenues and compressed margins.
  
• Ford's ambitious plans to reduce costs, despite targeting $1 billion in cost reductions, may fall short in the face of challenges like tariff uncertainties and fluctuating raw material costs, potentially impacting net margins.
  
• The company's strategy to increase mix and profitability in software and services might be insufficient to offset cyclicality in vehicle sales, challenging their goal to boost the percentage of profits from recurring, high-margin services, which will pressure overall earnings.
  
• Tariff and trade policy changes could materially impact Ford's profitability, especially if prolonged protectionist measures increase operational costs, leading to higher prices and reduced sales in the long term, directly affecting revenue.
  
• The commitment to investing in electric vehicles (EVs) and multi-energy solutions amid rising competition and regulatory pressure might not yield expected growth if consumer adoption lags, potentially resulting in lower-than-forecasted earnings.

Ford Motor Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ford Motor compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ford Motor's revenue will decrease by 8.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.2% today to 2.5% in 3 years time.
• The bearish analysts expect earnings to reach $3.6 billion (and earnings per share of $0.89) by about April 2028, down from $5.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, up from 6.3x today. This future PE is lower than the current PE for the GB Auto industry at 18.1x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Ford Motor Future Earnings Per Share Growth

Risks

• Ford Motor Company achieved an all-time record global revenue of $185 billion, marking its fourth consecutive year of topline growth. This sustained revenue growth could indicate continued financial strength if it persists.
  
• Ford is an industry leader in pickup trucks, with the F-Series being America’s best-selling vehicle. A strong market position in a profitable segment could lead to stable or increased revenue and profit margins in the future.
  
• Ford is expanding its revenue streams through software and physical services, with Pro software subscriptions growing by 27% and telematics software doubling. These new sources of high-margin reoccurring revenue could improve earnings.
  
• The company is executing a strategy to close its competitive cost gap by reducing operational costs, which resulted in a $500 million net cost reduction in the second half of the previous year. Continued cost discipline may enhance net margins and profitability.
  
• Ford is capitalizing on the growing market for hybrid trucks and planning for flexible multi-energy powertrains. By diversifying product offerings, Ford could capture a larger market share, potentially increasing revenue and earnings.

Valuation

• The assumed bearish price target for Ford Motor is $7.82, which represents one standard deviation below the consensus price target of $10.23. This valuation is based on what can be assumed as the expectations of Ford Motor's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $17.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $143.4 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $9.33, the bearish analyst price target of $7.82 is 19.4% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.