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Stocks  | June 9, 2021

Founded in 1903, leading auto manufacturer Ford Motor Company (F) operates through three segments—automotive, mobility, and Ford Credit. The company’s recent, high-profile launches of its Mustang Mach-E SUV, all-new 2021 F-150 pickup and Bronco Sport SUV, as well as the introduction of its all-new 2022 F-150 Lightning Pro have helped the stock gain 34.4% over the past month and 80.7% so far this year.

As the automaker continues to invest heavily in electric vehicles to keep pace with competitors, investors have been bullish about the stock’s upside potential.

However, given the current global semiconductor chip shortage, F assumes that it will lose 10% of its expected second-half 2021 production. Since the semiconductor shortage is expected to get worse before it gets better, the company’s business prospects for this year remain uncertain. Although F’s EV plans have garnered significant investor attention, its weak profit margin amid rising competition in the electric vehicle (EV) space could cause the stock to suffer a pullback in the coming months.

Here is what we think could influence F’s performance in the near term:

Gaining Momentum in the EV Revolution

On May 20, F agreed to joint venture with SK Innovation to produce approximately 60 GWh annually in battery cells and array modules in the United States. This agreement, also known as BlueOvalSK, is in line with F’s plans to accelerate R&D of battery technology and manufacturing. Because F plans to deliver its fifth-generation lithium-ion batteries and prepare for the rapid transition to solid-state batteries, the company is well positioned to capitalize on the EV boom.

Also, last month, F and the BMW Group expanded their agreements with Solid Power to utilize Solid Power’s high-energy and cost-effective all solid-state battery technology for future electric vehicles. Since this type of battery technology is important for forthcoming electric vehicles, this investment should solidify F’s position in the EV market.

Chip Shortage Can Mar Growth

According to consulting firm AlixPartners, the semiconductor chip shortage could cost the global automotive industry $110 billion in revenue in 2021. The chip crisis was further exacerbated by a fire at a chip-making plant in Japan in March, severe weather conditions in Texas and a drought in Taiwan. Since semiconductor chips are crucial components for safety systems, such as automatic braking and infotainment consoles, the disruption in supply has been hurting auto manufacturers’ production capabilities.

F anticipates a loss of approximately 1.1 million units of production this year and 50% of its planned second-quarter production because of the semiconductor shortage.

Mixed Historical Growth

F’s levered free cash flow has increased at a 56.2% CAGR over the past three years. However, its revenue and net income declined at CAGRs of 6.8% and 20.4%, respectively, over this period. The company’s EPS has declined at an annualized rate of 20.3% over the past three years.

Weak Profitability

The company’s 8.1% trailing-12-month gross profit margin is 76.6% lower than the 34.6% industry average. Also, its 6.6% EBITDA margin is 39.2% lower than the 10.8% industry average. And its 7.2% trailing-12-month levered free cash flow margin is 10% lower than the 8% industry average. Its ROTC and ROA of 0.5% and 1.5%, respectively, are significantly lower than the 5.3% and 3.7% industry averages.

Analysts Expect a Pullback

Closing yesterday’s session at $15.88, analysts expect F to hit $8.98 in the near term, indicating a potential 43.5% decline. Of the 17 Wall Street Analysts that rated the stock.

POWR Ratings Reflect Uncertain Prospects

F has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. F has a C grade for Growth and Quality. The company’s mixed growth history justifies the Growth grade. Also, its weak profitability is in sync with the Quality grade.

It has a B grade for Momentum, which is consistent with the stock’s price returns over the past month.

In addition to the grades we’ve highlighted, one can check out additional F ratings for Sentiment.

Bottom Line

F’s stock has gained 34.4% over the past month on the back of its increasing solid state battery investments, strategic partnerships and plans to capitalize on the ongoing EV boom. However, given that the company’s auto production is expected to decline significantly in the second half of this year, owing to a semiconductor chip shortage, we believe the stock could witness a decline. Thus, we think investors should wait for better entry points before investing in the stock.

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