Investing Club: Goldman Sachs cut its earnings estimates on Ford — here's what we think

Published Tue, Mar 22 20223:59 PM EDTUpdated Tue, Mar 22 20224:05 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

We're sticking with Ford Motor (F) even though Goldman Sachs cut its 2022 earnings forecast for the automaker in a research note Tuesday. It appears we're not alone in that view, either. Shares of Club holding Ford jumped more than 3.5% on the session. Reminder: The Club has a 1 rating on Ford , meaning we would buy the stock right here. We believe in Ford's transformation plan under CEO Jim Farley to become a leader in electric vehicles, while boosting profitability through operational efficiencies and connected services. What Goldman says Goldman now estimates Ford earnings at $2 per share in 2022, down 9% from its prior forecast of $2.20. It also lowered its price target on the stock to $20 from $22. Goldman left its EPS targets for 2023 and 2024 unchanged, at $2.10 and $2, respectively. In 2021, Ford posted adjusted EPS of $1.59. These updates came in a broader research note focused on the auto market and where the analysts now see production and sales in the coming years. Their outlook isn't great — but we don't think it's completely shocking if you've been following the auto industry. Here are the changes in Goldman's industry projections: Global auto production of 81.6 million unit sales in 2022, down from 85 million. In the U.S., a seasonally adjusted annual rate of 15.5 million unit sales in 2022, down from 15.75 million. Goldman cited additional supply challenges as the reason for its downward revisions, some of which stem from Russia's invasion of Ukraine. We believe that the war in Ukraine and recently high COVID case rates in Asia have exacerbated an already tight auto operating environment and supply chain inventory inefficiencies. Auto industry company commentary on chip supply has remained cautious in 1Q QTD, with ongoing factory downtime. ... We continue to expect volumes to improve in 2H22 and further in 2023 as more semi supply comes online, albeit at a lower absolute level than we previously assumed. The availability of semiconductors has been an ongoing problem during the Covid pandemic. Why lower earnings? Consumers still really want to buy new vehicles in this supply constrained environment, Goldman analysts wrote, which helps companies raise prices and mostly offset higher input costs and supply chain snarls. However, Goldman still believes there will be an earnings hit to the industry despite strong demand. In addition to cutting EPS projections for Ford and rival General Motors (GM), Goldman lowered its earnings forecast for the tier 1 auto suppliers it covers by 6% on average. Higher raw materials costs are to blame. In particular, the analysts called attention to year-to-date increases in palladium, nickel, aluminum and copper. Russia, which faces sweeping economic sanctions due to its attack on Ukraine, is a major supplier of these industrial metals. Steel prices have moderated, Goldman noted, but they remain considerably north of the long-term average. Quick aside: Steel maker Nucor (NUE), another Club holding, benefits from those elevated prices, even if they may weigh on Ford. It's a reminder about the importance of holding multiple investment theses at the same time and building a diversified portfolio to reflect that reality. Bottom line Ford shares closed higher Tuesday, along with the broader market. It's not that investors didn't care about the Goldman report, but clearly it didn't cause a sell-off in the stock. We believe that happened because investors have been aware of these challenges facing Ford and the auto industry more generally. Rising commodity costs tied to the Russia-Ukraine conflict and an uptick in Covid cases in Asia have both been well-documented. It may have been a different story if, hypothetically, a research report cited some newfound data that suggested a major slowdown to auto demand. That's not what's happening here, though, so our view on Ford remains still the same. (Jim Cramer's Charitable Trust is long F and NUE. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Thousands of Ford F-150s without chips are stored at Kentucky Speedway in Sparta, Kentucky, U.S., September 8, 2021.

Jeff Dean | Reuters