Ford’s fundamentals remain strong, despite recession worries, productions snags

By Jack Mclean On Sep 29, 2022

The economy faces a heightened risk of a recession, Ford (F) CEO Jim Farley told CNBC on Tuesday, a week after the automaker warned investors of $1 billion in unexpected supplier costs and parts shortages in the third quarter. But the Club is sticking with Ford because we believe it has what it takes to navigate macroeconomic headwinds and supply disruptions. “The risk has gone up for a moderate recession certainly from all the indicators we’ve seen,” Farley said. “For us as a business we see labor inflation, a lot of input costs are going up. We’re doing our best to overcome them…and we have a big job to do on costs specific to Ford anyways,” he added. The chief executive of Club holding Ford also discussed improvements in its chip shortage, even as he warned the company could face supply chain disruptions through next year. While Ford shares have undoubtedly come under pressure – the stock is down more than 40% year-to-date – the Investing Club is taking a long-term view on our Ford investment and is not shaken by what appear to be short-term constraints. Jim Cramer said Wednesday he won’t sell Ford here. “I find this a little absurd, frankly, because there have been problems the whole way around, but what matters is demand. If you sell Ford here, you’re selling it at a 5% yield,” he added. Earlier in the week, Jim said that investors who don’t own any shares of Ford should buy “aggressively” to take advantage of the yield . Ford last week said it anticipates third-quarter adjusted earnings before interest and taxes (EBIT) to be between $1.4 billion and $1.7 billion, well below the $2.99 billion estimate predicted by analysts, even as it reaffirmed a full year operating profit forecast of $11.5 billion to $12.5 billion. The automaker has been working on restructuring company costs to stay ahead of the competition to produce electric vehicles, an area that is expected to increase future operating margins. Supply chain pressure Last week, shares of Ford fell to their lowest level in more than 11 years when the company announced persistent part shortages. In its earnings preview, Ford said it expects to have 40,000 to 45,000 unfinished vehicles by the end of the third quarter that will have to be sold down the line. “I think it’s going to take a while – it could easily take through next year, and demand would have to fall way off for us to have the demand side solve this problem,” Farley said. Consumer demand has remained strong for Ford’s popular product line up, compounding the company’s production challenges. “We have a multiyear order bank now for our commercial vehicles,” the CEO noted. In light of Ford’s revised production outlook, Citi lowered its price target for Ford shares to $13 from $16. In a research note Tuesday, the bank said it was revising downwards its adjusted EBIT estimate for the full year, to $11.5 billion from a previous estimate of $11.8 billion, citing a difficult macroeconomic backdrop, international exposure and higher cost headwinds. But the bank still sees the automaker’s fundamentals as “macro resilient.” Ford, which has said it’s committed to ramping up production, recently announced a $700 million manufacturing investment in Kentucky that is expected to create 500 manufacturing jobs to support new vehicle production. Chips shortage Despite the ongoing supply chain challenges, Farley said the automaker’s chip shortage is improving. Indeed, the parts shortage in question is not chips-related, which makes us think the automaker has more control over production than investors realize, and can make up for missed sales in future quarters. “We’re seeing the chips situation get better. It’s not enough to supply the industry needs or what customers want to buy, but it’s getting better,” Farley said. “What’s really happening now is different. In the last quarter we started to see supply chain issues on non-chip issues.” (Jim Cramer’s Charitable Trust is long F. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Ford CEO Jim Farley poses next to a model of the all-new Ford F-150 Lightning electric pickup truck at the Ford Rouge Electric Vehicle Center in Dearborn, Michigan, April 26, 2022.

Rebecca Cook | Reuters

Ford CEO Jim Farley poses next to a model of the all-new Ford F-150 Lightning electric pickup truck at the Ford Rouge Electric Vehicle Center in Dearborn, Michigan, April 26, 2022.

Rebecca Cook | Reuters

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