Ford (NYSE: F) stock price has gone nowhere in the past two years. After peaking at $21.41 in January 2022, the stock has dropped by almost 50%, bringing its market cap to over $42.8 billion.
The stock has remained between the support level at $10 and the resistance point at $14 as investors assess the company’s future at a time of significant challenges. It has also dropped by over 11.65% this year even as the S&P 500 index has soared by almost 20%.
Big changes happening
Ford is not the only big car manufacturer that is struggling. Across the pond in Germany, Volkswagen is considering shattering plants in the country for the first time in its 87-year history.
In France, as we wrote before, Stellantis share price has crashed by over 42% from its highest point this year as some of its brands face major headwinds. Renault’s shares have crashed by over 51% from their 2018 highs while General Motors is down by 27%.
These companies are struggling because of the unprecedented changes that have happened in the last few years.
The big issue has been the growth of China as a big player in the auto manufacturing sector, something that was not happening in the past. Today, Chinese firms like BYD, SAIC Motor, Geely, and Great Wall Motors are selling millions of vehicles. China has even overtaken Japan as the top vehicle exporter.
Additionally, Ford and other old vehicle companies made a glamorous entry into the EV industry but have struggled to compete. As a result, after spending billions, they have started to scale back their EV ambitions.
Most recently, Ford announced that it was writing down some of its EV investments worth $400 million and ending the manufacturing of some of its models. It also ended its controversial EV dealership program and shifted its strategy towards hybrids.
Ford and General Motors are also now paying more money to their workers because of the extended strike we saw last year.
Ford financial results
The most recent financial results showed that Ford made over $47.8 billion in revenues, a 6% increase from the same period in 2023. While its adjusted free cash flow rose to $3.2 billion, its adjusted EBIT fell by 27% while the EBIT margin declined to 5.8%.
Ford’s revenue in the first half of the year rose by 5% to $90.6 billion while its free cash flow fell to $2.8 billion. Free cash flow, I believe, is one of the most important metrics because it shows the funds that remains after a company spends money on its operations.
Therefore, I believe that Ford’s decision to scale down its EV ambition is a welcome move. While governments are promoting EVs, there are signs that most customers still prefer Internal Combustion Engine (ICE) vehicles.
It is worth noting that Ford has never made money in the EV industry. In the last results, the division had a negative EBIT of over $2.5 billion and a negative EBIT margin of 194.8%. Its Ford Blue and Ford Pro divisions had EBIT margins of 4.3% and 15.9%.
Ford is extremely cheap but could be a value trap
The recent Ford’s performance has left behind a significantly cheap company trading with a forward P/E ratio of 6.50, lower than the sector median of 16.9. Ford also trades at a 0.25-forward sales multiple.
Most importantly, the company has a price-to-cash flow of 3.1, lower than the sector median of 9.57.
This cheap valuation is likely because investors don’t expect any material growth path in the next few years. They also question whether it needs to be in the electric vehicle industry, which is going through major challenges.
Most important, some analysts question whether Ford’s dividend of 7.1% is safe. For now, the company’s dividend is safe because of its low payout of 36% and its strong cash flow. Also, Ford has taken measures to reduce its costs.
Additionally, Ford has a great balance sheet. It ended the last quarter with over $26 billion in cash and short-term investments and $18 billion in long-term debt. The key challenge is that its financial division has over $81 billion in long-term debt against $58 billion in assets.
Ford stock price analysis
The weekly chart shows that the Ford share price peaked at $21.4 in 2020 and has now collapsed to $11. It has moved below the 50-week and 100-week Exponential Moving Averages (EMA).
Ford has also moved below the 50% Fibonacci Retracement point. The most important aspect is that it has formed a rectangle pattern that is shown in red. This pattern is part of a bearish flag one that has been forming in the past few years.
Therefore, while Ford is cheap, there is a risk that it will have a bearish breakout in the next few weeks. This breakdown will be confirmed if the stock drops below the lower side of the flag pattern at $9.40.
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