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 loss forecasted by analysts, a result of investments in electric vehicles. South America revenues were about $900 million, a beat versus the consensus estimate of $750 million. Adjusted EBIT of $149 million exceeded the $19 million predicted by analysts. Ford notched its fifth straight quarter in which its South America business was profitable. International markets group revenue was $2.8 billion, a beat versus estimates of $2.4 billion. Adjusted EBIT came in at $229 million, also a beat on analysts' estimates of $125 million. Ford Credit earnings before taxes (EBT) checked in at $600 million, missing analysts' forecasts of $749 million. Outlook Ford now expects full year adjusted EBIT of about $11.5 billion, which would be a 15% increase on 2021. That's at the low end of the $11.5 billion to $12.5 billion range management reaffirmed in September, but above the consensus estimate of $11.3 billion for the year. This outlook assumes higher commodity- and broad-based inflationary costs of about $9 billion, up from $7 billion last quarter. The company increased its estimate for full-year adjusted free cash flow to between $9.5 billion to $10 billion. That's a significant increase from management's previous guidance of $5.5 billion to $6.5 billion. The revised outlook was due to strength in Ford's automotive operations, including restructured businesses in regions outside North America. Argo Ford announced it will wind down its Argo AI business, which specializes in autonomous vehicle technology. For background, when Ford invested in Argo in 2017, the company thought it would be able to bring Level 4 Advanced Driver Assistance Systems (ADAS) technology to market by 2021. Level 4 ADAS is commonly referred to as "High Driving Automation" that requires minimum human interaction. This target has not been attained despite the more than $100 billion Ford invested in the technology. Ford remains a believer in the potential of L4 systems, but said the road to bring fully autonomous vehicles to market at scale with a profitable business model "will be a long one." For this reason, Ford is shifting its focus to Level 2+ (partial automation) and Level 3 ADAS (conditional driving automation), while winding down Argo. As a result, it recorded a $2.7 billion non-cash, pretax impairment on its investment. Some of the talent at Argo will join Ford. This pivot will raise concerns that Ford will miss out on the development of fully autonomous vehicles, whenever that may be. But from a business perspective, Ford is prioritizing the development of technology that will generate a more sizeable return in the near term. Other highlights The company said it is resuming a "modest" share repurchase program to offset dilution from stock-based compensation. Ford said its board of directors approved the repurchase of up to 35 million shares over time for that purpose. (Jim Cramer's Charitable Trust is long F. 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 . 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Ford F-150 pickup trucks at a dealership in Colma, California, on Friday, July 22, 2022.

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