Ford's earnings beat, significant free cash flow mean we're sticking with the auto stock

Published Wed, Oct 26 20228:07 PM EDT

Ford Motor (F) reported a top- and bottom line beat for the third quarter after the closing bell on Wednesday, while demonstrating solid free cash flow — a key reason why the Club continues to back the automaker. Automotive revenue climbed 12% year-on-year, to $37.2 billion, beating analysts' forecasts of $36.25 billion, according to estimates compiled by Refinitiv. Adjusted earnings before interest and taxes (EBIT), or operating income, came in at $1.8 billion, ahead of the $1.4 billion to $1.7 billion range Ford management had guided for in September. Adjusted earnings-per-share fell by more than 40% year-on-year, to 30 cents a share, but beat the consensus estimate of 27 cents a share. This figure excludes a $2.7 billion non-cash, pretax impairment the company took on its investment in Argo AI. Including this charge, Ford recorded a net loss of $827 million in the third quarter. Cash flow from operating activities was $3.8 billion, while adjusted free cash flow came in at $3.6 billion, beating analysts' estimates of $1.4 billion. Bottom line Ford continues to benefit from its strong pricing power and higher levels of profitability in regions that were previously money-losing before CEO Jim Farley took the helm in 2020, aggressively restructuring operations. Meanwhile, what stood out to us the most in the quarter was the significant free cash flow the business is generating. It provides plenty of support to the 4.6% dividend yield, new share repurchases and, most importantly, continued investment in its electric vehicle future. At the same time, management guided its full-year EBIT outlook to the lower end of the $11.5 billion to $12.5 billion range it had reaffirmed only last month. But that decision looks prudent because it will make it more likely the company can achieve its full-year guidance in the fourth quarter — and we remain cautiously optimistic on Ford's ability to do so. That's why we continue to own the stock, even as we maintain our 2 rating , meaning we would wait for a pullback before buying more shares. But given profit estimates have come down and stock multiples have contracted in this higher interest rate environment, we are also lowering our price target on Ford to $16 a share from $18. Ford's stock was down nearly 1% in after hours trading, at roughly $12.70 a share. Quarterly results by business unit North America automotive revenues were $26.3 billion, inline with estimates. Adjusted EBIT was $1.3 billion, below the consensus figure of $1.6 billion. EBIT margin came in at 5%, but management expects it to return to double digits in the fourth quarter. Europe revenues were $6.8 billion, beating analysts' expectations of $6.2 billion. Adjusted EBIT came in at $204 million, well ahead of the $31 million loss predicted by Wall Street. China revenues came in at about $400 million, below estimates of $600 million. Ford posted an adjusted EBIT loss of $193 million, steeper than the $30 million los