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Ford Motor Company (NYSE:F) stock has significantly underperformed the S&P 500 (SPX) (SP500) (SPY) since we downgraded it in our previous article. In addition, the Consumer Discretionary Select Sector SPDR ETF (XLY) was also hit, suggesting a broad downgrade among Ford’s sector peers.
Tesla (TSLA) CEO Elon Musk’s recent warning of a severe recession also added to a gloomy Christmas for auto investors, as he warned about the threat to discretionary spending.
Ford’s recent price hike for its F-150 Lightning EV could hurt its sales rhythm as Tesla has gone on the offensive to cut its prices. As such, investors may worry whether increasingly bleak macroeconomic headwinds could mean lower sales for Ford in 2023, along with its price hike.
Furthermore, the used car market has been in turmoil recently, as CarMax (KMX) reported disappointing earnings recently. Barron’s also warned about the spillover effect from the used car market, given its size, and therefore, possibly hitting Ford’s leasing business.
Therefore, we believe the market may be pricing in a weak Q4 compared to Ford’s previous full-year EBIT guidance of $11.5B, reflecting higher execution risks as we approach a recession.
The risks of recession on discretionary spending like cars are well known. Therefore, we believe that the downgrade in F’s valuation has been largely demonstrated. Notably, F is down nearly 45% YTD and the SPX has underperformed.
However, the demand outlook is likely to weaken further from Q3. Moreover, commodity prices remain on the high side despite the pullback from their June highs. Despite this, the S&P GSCI Commodity Index (SPGSCI) fell closer to its January levels, suggesting that its medium-term bullish bias has further weakened. Whether this portends a sustained reversal from its bullish bias remains to be seen. But, we believe the pullback in global commodity prices is constructive for discretionary stocks.
However, the auto chips supply chain is still experiencing snags that could keep capacity tight through 2023. However, due to increasing online capacity, this should help raise supply chain dynamics if a recession further hit the demand of car manufacturers.
However, the critical question is whether Ford’s EV capacity ramp could be affected going forward? We think not. Note that Ford recently announced its intention to build its $6B battery facility with SK Innovation, enough to produce 1M EVs per year. Therefore, we assess that Ford remains committed to climbing its target annual operating rate of 2M EVs by 2026.
Moreover, Bloomberg recently reported that Ford and CATL (the world’s leading battery producers) are “considering building a battery manufacturing plant in Michigan or Virginia,” relying on CATL’s LFP batteries . The details of how they will use the production tax credits in the Inflation Reduction Act (IRA) are still being ironed out.
We believe investors need to consider how Ford is making long-term plans to scale up its battery production. These are notable developments, suggesting the company is focused on its medium to long-term opportunities in the EV revolution. Hence, we haven’t seen any pullback in investments from CEO Jim Farley and his team, highlighting that Ford’s Model e (Ford’s EV segment) needs to curb its forward cadence.
Despite this, we agree that the downgrade to F is necessary to reflect the near-term risks of its implementation through recession, due to a hawkish Fed. But, with F’s NTM EBITDA of 9x, well below its 10Y average of 14.8x, bulls could argue that the market has too much pessimism.
F price chart (weekly) (TradingView)
The medium-term trend of F is undoubtedly bearish, after buyers have definitely rejected its August highs.
Sellers also prevented F from forming a recovery as it stalled higher momentum at its November highs, confirming F’s medium-term bearish bias.
So, could we be third time lucky as we picked its previous dips in July and September, expecting the rebound to occur?
In favor of the bulls, we get that F’s momentum is oversold as it reviews its September lows. However, we have yet to get a decisive bullish reversal, which suggests that buyers are not yet back to trap the bears.
In favor of the bears, F’s well-established medium-term could force a decisive break from its lows in July and September. Such a development would not be beneficial for the bulls, indicating that the market is likely to expect worse downside risks in 2023 due to recessionary headwinds.
Therefore, while we are ready change our rating back to a Buywe urge investors to be cautious of downside volatility and not to catch falling knives if the 200-week moving average of F is definitely breached.
Stay safe, and Happy Holidays!
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