What you need to know ahead of Ford’s earnings, especially after GM's profit miss

Published Wed, Jul 27 20229:36 AM EDTUpdated Wed, Jul 27 202210:55 AM EDT

The auto industry has experienced declining sales growth in 2022. The semiconductor chip shortage, a key component in building many modern-day vehicles, is still a major challenge preventing the industry from scaling production to meet demand. Club holding Ford Motor (F) has no doubt been impacted. However, the automaker is still seeing gains and outperforming the industry in sales. Here's what you need to know ahead of the company's results, which come out after the closing bell Wednesday. Ford is a longer-term play EV battery capacity How the competition lines up Bottom line Ford is a longer-term play A hurdle the auto industry has been facing is higher new car prices due to low car inventory, driven by the chip shortage. But as pent-up consumer demand for new vehicles continues over the next few years, Ford is one of the best-positioned automakers because it is the biggest commercial consumer. In June, while overall auto industry sales were down 11%, Ford sales in were up 31.5% compared to a year ago, outperforming its peers despite the chip shortage and supply constraints. Ford's electric vehicle sales were up 77% in June compared to a year ago, helped by its F-150 Lightning being America's best-selling electric truck in the month. Ford delivered $34.5 billion in revenue in the first quarter , which was $3.1 billion less than the year before but still beat earnings expectations. If it wasn't for supply chain issues, that number could have been higher given Ford's strong demand for its new line-up of cars. A good problem that Ford has is high demand outpacing resources available to scale its production. Despite the chip shortage, Ford will still be producing cars, and its business remains strong because of limited inventory. Most importantly, Ford is a financially sound company. It has strong total company cash of $23.6 billion and liquidity of $44.6 billion, according to the company's first-quarter earnings release . Ford also maintained its full-year positive outlook on profitability. EV battery capacity Ford has also been making great strides to electrify its fleet as high demand for EVs persists. In its EV battery capacity plan update last week, Ford announced that it has secured 100% of the annual battery cell capacity needed to support its goal of selling 600,000 EVs annually on a global scale by late 2023. A highlight from the plan was Ford's addition of lithium iron phosphate battery chemistry to its portfolio, which will allow the automaker to build more units required for EVs as well as reduce the reliance on other scarce minerals such as nickel. This new chemistry will also allow Ford to save 10% to 15% on its bill compared to the nickel-based batteries. How the competition lines up Ford competitor General Motors (GM) on Tuesday morning delivered mixed second-quarter results, with better-than-expected revenue of $35.76 billion, up nearly 5% increase over last year, and lower-than-expected adjusted earnings of $1.14 per share. That numbers highlight the pressures of protecting profit margins as material costs rise in price. Top auto industry leaders are racing to be the leader in EVs. GM aims to achieve an all-electric future and overtake Tesla (TSLA) and Ford. However, it fell short in delivering about 100,000 vehicles by the end of the quarter, while Tesla delivered more than 254,000 vehicles during the same period. When Ford's numbers are out later in the afternoon, we'll be looking at whether the company has kept up its sales momentum and EV production and how it fared overall in this challenging economic environment. Bottom line The Club invests in Ford because the automaker is working on aggressively cutting costs, refocusing its business on profitable regions and quickly progressing in its efforts to electrify its fleet. In June, CEO Jim Farley told us that the company is closing its Ford Focus plant in Germany because it was losing money but plans to keep open a second German plant that's profitable. Ford also decisively restructured its South American operations in January 2021, which included shutting down a manufacturing plant in Brazil, allowing the company to increase its operational efficiency. The restructuring resulted in three consecutive quarters of profitability. These actions have helped Ford improved its profitability, which can help the automaker weather headwinds many other companies are facing this earnings season like higher input costs. Ford shares are down about 38% for the year, but this is not a reason to sell. The stock's drop alludes to recession fears in the U.S. economy, Ford's main market, and the rising prices of batteries. But while the macroeconomic backdrop is difficult, Ford's management team appears to be executing on factors it can control. The stock's correction is one of the reasons why Nomura upgraded Ford to neutral from reduce (hold from sell), seeing Ford shares as no longer overvalued. The Club has a 2 rating on Ford, which means we'd like to see a pullback before buying more. The stock is trading at less than 7 times earnings, nearly half the valuation it came into the year with. This indicates that despite earnings estimates coming down a bit throughout the year, as economic concerns increased, the stock has become significantly cheaper as it moved lower. Remember, a stock can move lower, but if the valuation doesn't move lower as well, the stock isn't becoming a better value. Ford also pays a slightly greater than 3% dividend, which has us patient and willing to ride out the drop. (Jim Cramer's Charitable Trust is long F. See here for a full list of the stocks.) Correction: This story has been updated to clarify Ford's first-quarter cash and liquidity numbers. 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.

Traders work on the floor of the New York Stock Exchange (NYSE) on April 28, 2022 in New York City.

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