Motoring along: Carmaker's results solid despite supply chain pressures and AI misadventure

Despite a host of challenges, largely outside of its control, this US carmaker delivered a solid result – even if it did reset expectations lower by pre-guiding results last month.

A lack of demand is not currently the problem. There are enough Americans (and Australians, for that matter) that love pickup trucks to ensure that everything that gets pumped out of their Kansas City plant gets bought up, quick smart. The problem is one of supply.

That said, the times they are a-changin'. If a recession hits early next year in the US, then gummed-up supply chains might pale in comparison to the problem of a sharp drop in demand.

That’s the view of abrdn’s Multi-Asset Investment Director, Raf Choudhury, who took the time to plough through Ford Motor Company’s (NASDAQ: F) results with me earlier today.

With a US-led global recession in the first half of next year the base case for abrdn, Choudury is mindful of the impact on the entire sector, not just Ford.

"Even in his comments, Jim Farley, the Ford CEO, talked about the risk of recession going forward and if you put it in that context, we've seen a fairly strong selloff this year, but you wouldn't be surprised to see further weakness", says Choudary

In this wire, Choudhury also talks to Ford’s misadventure into autonomous driving, and why he thinks taking a US$2.7 billion hit now might be the best medicine. 

FORD (NYSE: F) FY22 Q3 key results

Please note the 'expected' numbers below are consensus forecasts 

• Earnings per share (EPS): US30 cents vs. US27c expected
• Adjusted earnings of US$1.8 billion for the quarter, down 40% year on year but slightly above its own previously announced expectations
• Net loss of US$827 for the quarter
• Automotive Revenue: US$37.2 billion vs. US$36.25 billion expected
  
• Recorded a US$2.7 billion non-cash, pretax charge on its investment in Argo AI
  
• Extra US$1 billion in unexpected supplier costs during the quarter
  
• Updated full-year adjusted EBIT guidance to about US$11.5 billion
  

Note: This interview took place on Thursday 27 October. 

What was the key takeaway from this result?

The results were not much of a surprise, broadly in line with expectations. Given the forward guidance that we'd seen, our EPS assessments had come down from around 32 cents to 27- 28c. So the announcement of 30 actually has come in line with expectations and probably actually beat expectations. The forward guidance probably helped drive down some of those expectations and it's come in higher than that, but obviously lower than where expectations were if you go back a month or two.

So there was nothing really that surprising. I think a ‘marginal beat’ is how I'd frame it. The revenue numbers were stronger than anticipated, so the revenue numbers came in at US$37 billion versus US$36 billion. So that's a little bit surprising given some of the challenges that they've been highlighting and that we're aware of in the broader segment.

I guess Ford's a little bit more resilient if you think about it from how the stock is performed this year. Thinking about it on a 52-week basis, it's down 17%, something like that, versus the Russell 3000 auto sector, which is down 33%. So it has been more resilient than the broader sector, but that really disguises the peak to trough that we saw. There was a positive rally in January on the back of earnings. So, peak to trough is down 50%. So, I think this set of results is probably in the broader context of where we are in the cycle, the markets, the current macroeconomic conditions, and supply chain constraints, it's actually a modestly positive result. 

What was the market’s reaction to this result? In your view, was it an overreaction, an underreaction or appropriate?

The announcement was after the (US) close. If you look at the price action after close, it was at down about 3%. So then it rallied to be down 1%. There was a big readjustment of expectations around that. But I think that's broadly in line.

We talk about it being a beat, yes, but it's still a lower number than previously anticipated. So it’s broadly in line. Even in his comments, Jim Farley, the Ford CEO, talked about the risk of recession going forward and if you put it in that context, we've seen a fairly strong selloff this year, but you wouldn't be surprised to see further weakness.

In terms of how markets reacted on the back of these results, as a single data point, the reaction makes sense. Ford did a good job in the forward guidance, a month ago, signalling the billion-dollar hit, supply chain constraints, and other bits and pieces.

Were there any major surprises in this result that you think investors should be aware of?

I guess the surprise, not in the earnings, was with the additional announcement around closing the AI program. That was a bit of a surprise. US$2.7 billion hit. It's a joint venture with VW. I think the fact that Ford had been making quite a lot of good progress towards EV, and this was one of the things that was part of that program or that transition from a broader business perspective.

While it will be a short-term hit for them, longer term it's probably going to prove to be quite prudent. 

When it comes to fully autonomous driving, the CEO has basically said it’s still a long way off. They're still very optimistic about it, but they don't feel that they need to be the ones that are driving the creation of it. Which is actually a fairly prudent move. Because you can imagine what the R&D expenses are like. And in the meantime, they're going to pivot and focus on other types of not fully autonomous but autonomous types of tech. So things that help you without taking away full control, and potentially later on when that technology is available, the intimation was that they could purchase it – but just cut the expense from the R&D at the moment.

Would you buy, hold or sell FORD on the back of these results?

The context here is really important. If you're thinking about it as a long-term investor, the stock being down 50% from peak to trough, there might be some more potential downside given broader macro-driven pressures. It probably looks attractive at current levels, especially if you are a long-term buy-and-hold investor. But that context is important.

So if you're thinking more short to medium-term, our view is that we do think there are additional headwinds coming. Our macroeconomic base case is for a US-led global recession through the first half of next year. If you think about that as the base case - and this is something that was highlighted by the CEO as well, the possibility of a recession next year - that probably leads you to be a little bit more cautious about the further downside in the short to medium term. If we were holding it, we would probably continue to hold it, but would I be looking to add on a short to medium-term basis? Probably not.

What’s your outlook on Ford and its sector over FY23? Are there any risks to this company and its sector that investors should be aware of?

So given our base case, which is for a US-led recession through the first half of next year, the outlook probably remains challenging. If you think about the supply side constraints, how they've been impacting inflation, kind of hitting the consumer, and if we think about the autos, it's a consumer-led business ultimately. 

So, in that recessionary environment with higher inflation, and additional cost pressures -  they're all longer term - but they're all potential headwinds that will create further challenges for the broader sector. 

Also, buying a car is discretionary spending, so in a recessionary-type environment, that's definitely going to take a hit.

At the same time, there's a supply and demand dynamic here at play within the sector itself where it probably tilts towards the downside. You only have to look at second-hand car prices at the moment. We see it here in Australia as well. I know people are selling cars that are two or three years older at higher prices than the sticker price.

So obviously, that’s a different segment of the market, but it does feed into the broader macro picture. If we think about recession hitting, it's a negative and a headwind for the sector as a whole.