Wall Street sees opportunities for legacy automakers like Ford to stand out in 2024 despite the challenges the industry faces as demand for electric vehicles softens. Ford could make for a successful year by doing two things: continuing its strategic shift toward more profitable hybrids instead of heavy investments in less lucrative EVs and improving quality issues. 1. Shift to hybrids Ford is not willing to go broke on EVs. CEO Jim Farley is moving away from cars that don’t make money, like electric vehicles while doubling down on areas that do make money, like hybrids. Jim Cramer believes management should put more resources into the company’s “incredible hybrid business” to boost profits. Underscoring our optimism, total hybrid sales last week came in strong for the fourth quarter and the year. They grew 55.5% for the quarter while EV sales rose 27.5%. Internal combustion engine (ICE) sales were down 3.4% in Q4. For all of 2023, hybrids gained 25.3%, EVs rose 17.9%, and ICE increased 5.5%. With higher-margin hybrid sales topping the quarter and the year, the Maverick Hybrid was the best performer, with a 67% increase in 2023 sales from the year-ago period. The F-150 Hybrid also was a winner, with sales gains of 41% in 2023. Compelled to reduce its EV investments, Ford last month announced plans to cut production of its all-electric Lightning in half this year as it works to “match production with customer demand.” The Lightning was still a top seller for Ford, with sales up 54.7% for all of 2023. What does Wall Street think? Morgan Stanley and Wells Fargo analysts are taking a pretty pessimistic view of the auto industry in the year ahead. F 1Y mountain Ford 1 year Reflecting that apprehension, the late-2023 upswing in Ford stock has been reversing a bit in the new year. But like us, Morgan Stanley sees a way higher for Ford. Analysts at Morgan Stanley described in a mid-December outlook note a bearish tilt toward the auto industry, citing the need for companies to figure out how to navigate a slower EV demand environment while continuing to fund unprofitable EV projects to compete with market leader Tesla . The analysts, however, also believe legacy automakers like Ford and General Motors have a “significant opportunity for value unlock” through capital allocation, spending discipline, and focusing on more profitable products in their portfolio. These prudent management decisions over the next year, analysts believe, “will be highly deterministic to industry/individual stock share price performance.” “GM and F have room to re-calibrate spending direction and magnitude as they continue to address capital allocation across the business portfolio,” the analysts explained. This could mean management may “pull back on EV offerings due to a lack of profitability.” They added that while Ford is still committed to EVs, it will likely be “at a far lower rate than projected.” Morgan Stanley also suggested it would be reasonable for them to focus on ICE products, whose profits are helping offset EV losses since Ford and GM’s pick-ups and SUVs deliver durable cash flow and account for a huge percentage of total profits. In a separate, less encouraging outlook, Wells Fargo said in mid-December that automakers “face numerous significant challenges into 2024,” citing falling car prices and excess capacity for EV production in contrast to diminishing demand, which could result in a negative impact on profit margins. The analysts forecast a $200 million headwind from Ford’s EV mix along with a $3.2 billion pricing headwind due to declining car prices. Wells Fargo also sees a $2.4 billion headwind from elevated labor costs and advertising. An offset we saw is auto sales could improve if inflation comes down enough to allow the Federal Reserve to start cutting interest rates. Since most people need to take out a loan to buy a car, if rates come down it will be cheaper to make those purchases. 2. Quality control The second thing Ford must address is quality issues. The company has been dealing with high warranty costs, eating into profits. Ford’s weaker-than-expected third-quarter earnings , were in part driven by a $1.2 billion year-over-year increase in expenses from warranties. Management said at the time that higher warranty costs were driven by recalls and higher repair costs due to inflation. Quality control has been a problem at Ford for years, predating Farley’s time as CEO. If management can get a better handle on their warranty issues, there should be fewer quarters with unexpected holes in earnings. (Jim Cramer’s Charitable Trust is long F. See here for a full list of the stocks.) 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Wall Street sees opportunities for legacy automakers like Ford to stand out in 2024 despite the challenges the industry faces as demand for electric vehicles softens.
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