The Ford Motor Company is due to release third quarter results later this month. Previously, it reported a robust set of financial results in Q2, topping both revenue and earnings estimates, as well as raising guidance for full year fiscal 2021.
Second quarter non-GAAP EPS came in at $0.13, compared to a loss of $0.35 in the same quarter in 2020. Revenue grew 45% year-on-year to $24.1bn, an increase of $1.29bn. The company also provided a strong rise in guidance for the year with adjusted an EBIT range of between $9bn and $10bn, an increase of 50%. Another significant increase in the guidance was the adjusted free cash flow (FCF) of $4bn to $5bn, resulting in an attractive 12x FCF valuation.
The company appears to be in turnaround mode after years of underperformance. Ford has launched a slew of new models, on the back of the electric vehicle zeitgeist, where consumers are choosing to transition from fossil fuels to a cleaner, more environmentally friendly, energy. This trend has and will continue to have a significant impact on all facets of the global economy. The worldwide automotive industry has had to implement new business strategies to benefit from this new business paradigm. New products such as the Ford Mustang Maverick and E150 Lightning trucks are amongst the new model launches. Orders for the new EV truck are already over 120,000 units, with operating margins higher than its more conventional product range.
Fords restructuring has already born fruit in its European operations, and the introduction of EV’s with higher margins should be a plus factor. Strong brands like the F150 truck, which is one of the most popular pick-up trucks in the world, is a testament to the popularity of the product and customer loyalty.
The company is expecting full year volumes to rise by 30%, which would result in higher plant utilization and economies of scale. This will have a positive impact on the bottom-line EPS numbers. However, the shortage of semi-conductor chips, a crucial part of electric vehicles, could pose a challenge in the short term.
Group CEO, Jim Farley, anticipates improvements in the availability of semi-conductors during the second half of 2021, and believes that the joint venture with a leading South Korean battery manufacturer, should also be a positive factor going forward.
The company’s share price year-to-date has increased by around 59%, off a low base, and still represents an inexpensive entry point. Ford is on a forward PE of around 10x. At the current share price of $13.70, with a market cap of $55bn, and a price-to-sales of 0.40x, some analysts suggest fair value of $18.0 a share by year-end. I am invested in the company in segregated portfolios for the EV theme, which should be the catalyst for the business in terms of a turnaround.