F: Why is Ford Motor Stock Down?

Shares of automobile manufacturing giant Ford Motor Company (NYSE: F) are trading lower by almost 5% in early market yesterday. The pullback was due to Ford’s disclosure that supplier costs will be $1 billion higher in Q3 than initial forecasts. Ford attributed the higher costs to inflation and ongoing supply chain issues.

Ford also explained that disruptions in supply chains have resulted in a backlog of thousands of vehicles that are yet to be shipped. It expects between 40,000 and 45,000 incomplete vehicles to remain in inventory by the end of Q3 due to a shortage of parts.

The supply chain is hurting Ford and its peers

Several automobile manufacturers have been wrestling with supply chain bottlenecks since the start of the COVID1-19 pandemic. While most economies have reopened, China which is a global manufacturing hub continues to impose lockdowns if there is a spike in COVID-19 cases.

Last month, Rivian (NASDAQ: RIVN) warned its losses might surge to $5.45 billion in 2022, compared to an initial estimate of $4.75 billion. Its higher losses are tied to raw material inflation and supply chain challenges.

Additionally, in July, General Motors (NYSE: GM) reported a net income of $1.69 billion, a decline of 40% year-over-year, again due to chip shortages and supply chain concerns that resulted in bottlenecks at its factories.

Despite an inflationary environment, Ford has maintained its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) guidance of between $11.5 billion and $12.5 billion in 2022, as the company expects to sell the excess inventory in Q4 of this year.

Ford stock price has massive upside potential

While Ford is a legacy automobile manufacturer, it is now fast gaining traction in the electric vehicle segment. In July, Ford’s total sales rose 36.6% year-over-year, while EV sales almost tripled to 7,700 units. In the first seven months of 2022, Ford has sold 30,648 vehicles gaining some serious momentum year-to-date.

Ford managed to outpace the broader market, as total auto sales fell by 10.5% in July. So, Ford is experiencing strong demand allowing it to gain market share from peers.

During its Q2 earnings call, Ford’s CEO Jim Farley emphasized, “We believe that these great new products will help us to grab an outsized share of the rapidly growing EV market, combined with our healthy and vibrant shares of our ICE [internal combustion engine] and growing hybrid markets.”

Ford now expects to end 2023 with a monthly EV production capacity of 60,000 units. It also aims to increase manufacturing capacity by two million EVs by the end of 2026. Ford sold 3.9 million vehicles in 2021. So, EVs should account for at least a third of the total automobile sales for Ford by 2026.

In Q2 of 2022, Ford increased revenue by $13.4 billion year over year to $40.2 billion. Due to its improving financials, it increased quarterly dividend payments by 50% to $0.15 per share, indicating a forward yield of 4%.

So, an investment of $10,000 in Ford stock would allow investors to generate $400 in annual dividend payments.

Ford stock is undervalued

Valued at a market cap of $60 billion, Ford is expected to increase sales by 16% to $146 billion in 2022 and by 7.6% to $157 billion in 2023. So, it's valued at 0.41x forward sales. Ford stock is also trading at 7.2x forward earnings, which is quite attractive, given its adjusted earnings are forecast to rise by 13.5% annually in the next five years.

Related: RIVN: Can Rivian Stock Touch $75 Next Year?