A bad earnings miss for the Ford Motor Company didn’t send the stock crashing down. Could it be a sign of strength and potential gains

Today we dive into the strength of Ford and decide if it is a stock worth investing in.

Despite a turbulent 2022 for the automotive industry, 2023’s earning season started strong, with  General Motors’ strong fourth-quarter results exceeding expectations and leading to increased investor enthusiasm.

The positive earnings, driven by strong revenue, caused a rise in GM’s stock price, and also resulted in anticipation of similar results for other motor companies like Ford, leading to a rise in its stock as well.

However, on February 2, Ford surprisingly released weak fourth-quarter results, contrary to Wall Street’s expectations.

Moreover, the company’s management has yet to disclose specific details about how they plan to address their issues.

Despite this disappointing turn of events, Ford’s stock price surprisingly held well, showing strength in the face of bad news.

Could this be a precursor for an upwards move?

In spite of the highly competitive nature of the auto industry, Ford, a century-old brand, has managed to maintain its relevance.

This has remained true even with the growing market share of electric vehicles, as Ford has shifted its focus towards the EV segment.

The recent improvement in economic conditions in the Eurozone, coupled with the anticipated stabilization of the US economy, may rekindle the interest of both consumers and investors in Ford.

Furthermore, the reopening of supply chains and input costs in China could help build confidence among cyclical investors waiting on the sidelines.

You see, Ford also has lots of bright spots going for it, but would it be enough to entice the investors to go on their side?

Hop on in to find out!

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The Bull Case for Ford

More than 20% of Ford’s sales come from Europe, making the Russia-Ukraine conflict a major concern for investors.

However, with recent declines in fossil fuel prices, most analysts have upgraded their economic outlook for the Euro region.

The improved economic outlook is expected to boost discretionary items, as renewed consumer confidence could drive demand.

This creates a favorable situation for Ford, which could benefit from this tailwind.

Global economic recovery in the second half of the year is expected to lead to a rebound in conventional auto sales, which is beneficial for Ford as the majority of the U.S. and global middle class still prefer conventional cars.

The economic comeback is likely to benefit conventional cars, as the majority of the U.S. and global middle class still prefer to purchase them.

In Europe and North America, the average sale price of EVs has actually risen since 2015, as mentioned in my recent article about Tesla.

Although Ford’s sales in China currently only represent a small portion of its revenue mix, the country’s pandemic lockdown re-openings still have serious benefits.

For one, it offers Ford an opportunity to enter the prospective Chinese market.

Additionally, the reopening of China could lead to more efficient input costs, and increased production for companies such as Ford, by streamlining supply chains, which may lead to an improved bottom line for Ford, and hopefully, translate into stock gains.

When the economic recovery finally occurs, it is likely to drive global auto sales to new record levels, and primarily benefit car manufacturers that cater to the middle class such as Ford.

Potholes Along the Way

Ford has traditionally depended on its North American business to generate profits, which is still performing well, but its international business is facing ongoing challenges.

Its European results fell below expectations, and its business in China continues to lose momentum, according to some metrics.

Investors typically prefer to hear about growth strategies, but despite negatively affecting revenue in the short term, the decisions to prioritize its strengths in Europe and China could ultimately enhance profitability, but reap the benefits in the future.

Going back to Ford’s fourth quarter, investors had to deal with plenty of bad news, but the most alarming aspect was that the management has been ambiguous in providing detailed answers to shareholders.

Ford has acknowledged that it has significant issues with its industrial system, and must improve its manufacturing and engineering procedures throughout the entire process, missing out on around $2 billion in profits that were under its control.

In addition to that $2 billion in missed profits, the large special items were possibly even worse.

These special items for the full year of 2022 included a massive $7.4 billion mark-to-market net loss on its Rivian investment, and an additional $2.7 billion impairment on its Argo AI investment.

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Just a Pitstop?

In the long run, it is good that Ford is staying loyal to its established models, instead of putting all its efforts into EVs.

I anticipate that the transition to EVs will be significantly costly for consumers, which implies that Ford can still provide affordable options, as other companies may struggle with rising input costs and limited materials.

Ford also presents a cyclical investment opportunity, that stands to gain from the shift in the economic cycle.

After a challenging start to the decade, it is expected to benefit from the return to more normal economic conditions.

While it may not appear in the short term, positive news regarding the global economy may increase as we approach the second half of the year.

Contributing factors could include the post-zero-Covid economic recovery in China, the easing of monetary tightening, and potential discussions of reversing interest rate trends.

If these happen sooner rather than later, all these should benefit Ford and with all things considered, now might just be the opportunity for investors to ride this stock, while it’s still having a pit stop!

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