Why Ford Stock Lags Behind GM, And How It Can Recover

Ford stock (NYSE:F) has declined by about 10% year-to-date, compared to fellow U.S. auto giant GM (NYSE:GM) which has gained close to 29% over the same period. The underperformance of Ford comes despite a reasonably healthy financial performance in recent years, with revenues and cash flows expanding. Ford’s valuation is very attractive, with the stock trading at a mere 6x 2024 consensus earnings.

While Ford stock has actually risen in the last 3-years, the incrase has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 137% in 2021, -42% in 2022, and 16% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could F face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

We value Ford stock at about $14 per share, which is around 30% ahead of the current market price. See our analysis on Ford Valuation: Expensive Or Cheap for more details on what’s driving our price estimate for Ford.  For more information on Ford’s business model and revenue trends, check out our dashboard on  Ford Revenue: How Ford Makes Money. So why exactly is Ford stock underperforming and what are some of the trends that could drive a recovery?

Higher Warranty Costs

Ford recently posted a weaker-than-expected set of Q2 2024 results. Adjusted profit for the quarter came in at $0.47 per share, below consensus estimates and a 35% decline from the $0.72 the company reported in Q2 2023.  This is in contrast with GM which beat expectations. Although Ford saw revenues grow by about 6% over the last quarter, its earnings were hit by an increase in warranty repair costs amid issues with cars built in 2021 or earlier. Ford has faced multiple quality issues with its vehicles in the past years driving up the warranty costs. Moreover, these costs are sometimes recognized suddenly, without warning, leading to weaker-than-expected results. For Q2 for example, earnings fell almost 30% short of estimates as Ford’s $800 million spike in costs caught investors by surprise. Now Ford is working on improving the quality of its vehicles, with the company noting that it was now testing vehicles to failure in order to discover quality problems. However, the process could take over a year to reflect on warranty cost improvements.

Rocky EV Transition, Mixed Economic Outlook

Separately, there have also been concerns about the demand environment. Ford saw its overall volumes for Q2 rise by just about 1% year-over-year amid high interest rates which have made vehicle financing expensive. Consumer spending has also been easing in the U.S. The average price paid for new vehicles declined by 3% for the first six months of this year, compared to last year, per research firm J.D. Power meaning that the pricing power that automakers saw post the Covid-19 pandemic is easing. Separately, Ford’s plans of transitioning to EVs have hardly been smooth. Ford’s Model E division, which sells electric vehicles, lost $1.3 billion at an operating level, compared to the traditional auto segments that earned a combined total of $3.9 billion. Ford has also pivoted its EV plans, moving away from larger vehicles and instead focusing on a smaller next-generation EV platform. These larger SUVs will now have hybrid powertrains instead. This led to Ford taking a non-cash charge to the tune of $400 million relating to the sunk costs.

Catalysts For A Recovery

However, we think there is an upside for Ford stock. One primary driver is the continued strong performance of its truck division, especially the flagship F-150 series. Sales of the F-Series trucks reached 199,463 vehicles in Q2 2024, marking a 30% sequential increase. Hybrid F-150 sales also saw a 38% year-over-year growth, with 33,674 units sold, reflecting consumer demand for a broader powertrain lineup. Trucks, with their higher margins, remain Ford’s most lucrative segment, and sustained strength here could support profitability in the coming quarters.

Ford’s potential to boost its capital return program could also add further to shareholder value The company’s cash flows have been strong, with free cash flow generation for 2023 reaching approximately $6.8 billion, significantly surpassing initial projections. Ford has been paying dividends of about $0.15 per quarter, along with a special dividend of $0.18 in March. Given the robust cash flows, there is potential for additional special dividends. At present, Ford plans to distribute 40% to 50% of its annual free cash flow to shareholders. This year, the company has raised its adjusted free cash flow guidance to a range of $6.5 billion to $7.5 billion, up from the initial outlook of $6 billion to $7 billion.

Additionally, Ford’s pivot in its EV strategy, which now focuses on a balanced mix of gas, hybrid, and electric vehicles could allow it to cash in on evolving consumer preferences without overspending on costly EV development. Slower industry-wide EV growth could also give Ford a chance to improve its profitability in the traditional segments as it invests in refining its electric vehicle offerings. Additionally, the market for hybrid vehicles is picking up, with Ford seeing its hybrid sales expand considerably, rising 56% year-over-year to a new quarterly record of 53,822 units in the U.S. for Q2. This should bode well for the company’s profitability in the interim.

The recent monetary easing in the U.S. could also bode well for automakers like Ford. The Fed’s 50 basis point rate cut earlier this month marked the first interest rate cut in close to four years. With the benchmark federal funds rate standing at 4.75% to 5% post the cut, there remains room for the central bank to lower interest rates further. Check out our analysis of other ways to profit from the Fed’s next move? 

While investors have their fingers crossed for a soft landing by the U.S. economy following rate cuts, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 9/30/2024
[2] Cumulative total returns since the end of 2016

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