Ford Motor Company (NYSE:F) investors are likely asking themselves what’s going on with the rollercoaster ride they have experienced since its share price hit bottom in July 2022. Interestingly, while dip buyers have held the $11 support level with high conviction since then, F didn’t find sustainable traction moving past dip buying opportunities toward momentum buyers chasing further upside.
While the recent bullish reversal from its May 2023 lows showed promise, it was rejected again at the $15 level, which was also F’s November 2022 and early February 2023 highs.
As such, market operators don’t seem convinced with Ford’s electric vehicle (“EV”) transformation plans, despite attracting an “A-” valuation grade from Seeking Alpha Quant. Ford Bears likely point out that F’s topsy-turvy recovery suggests it remains a perilous trap for undiscerning investors who have hopes about legacy OEMs emulating Tesla’s (TSLA) dramatic success.
I believe these Bears have a valid point, as Ford’s second-quarter or FQ2 earnings release in late July reduced the execution credibility of CEO Jim Farley and his team. Accordingly, Ford’s production scaling plans have encountered a significant setback. Keen investors should recall that Ford expects an annualized production run rate of 600K vehicles by 2024, no longer this year. Management should be lauded for providing clarity to investors about its EV segment losses. However, its revised $4.5B EV segment loss guidance (from $3B previously) could have stunned some investors into giving up, as the revision represented a 50% increase in expected loss for Ford Model e.
Coupled with the increased uncertainties emanating from the negotiations and pushback from UAW over significant wage increases and other contract/benefits modifications, investors are likely feeling jittery. In addition to these headwinds, I must also point out that analysts (Neutral bias) have been lukewarm about Ford’s transformation plans. While Ford Blue and Pro continue to deliver robust EBIT segment profitability, Ford’s recent EV segment adjustments underscore the substantial challenges of scaling up a new segment.
Morningstar’s reminder and caution that “Ford does not have a moat, and [it] does not expect that to change” should be noted by investors. Berkshire Hathaway (BRK.A, BRK.B) CEO Warren Buffett cautioned in May about the difficulty of consistently operating profitably in the auto industry. Buffett and colleague Charlie Munger reminded investors that “the auto industry is too tough and not a business they find fascinating to be in.” Moreover, the significant challenge of transiting to EVs shouldn’t be understated. As such, while Buffett and Munger observed it to be “an interesting development, it’s imposing huge capital costs and risks,” which they don’t admire.
As such, while the UAW negotiation could have contributed to the recent downside, F’s troubles started after it failed to break out decisively in early July. Notwithstanding my concerns, I must highlight that F has again entered highly pessimistic zones.
My Buy thesis on F in the past was often grounded on market pessimism/negative investor psychology. I believe it wouldn’t be different this time. Ford’s reduced credibility in its earnings guidance and the recent UAW contract negotiations likely caused some investors to bail out. That’s ok and is justified. However, the market is also quick to reflect these challenges, as F has given up most of its upside from May.
As a result, with F returning closer to its critical support zone of $11, is it time for dip buyers to strike again?
F price chart (weekly) (TradingView)
As seen above, F topped out in early July (well before its Q2 earnings release), as these sellers correctly anticipated Ford could disappoint. As a result, F buyers failed to execute a decisive breakout higher, denied again at the $15 level.
The selloff intensified this week, likely attributed to further risk off sentiments due to the UAW negotiations. As such, the market is likely pricing in additional cost adjustments to Ford’s near- and medium-term guidance, indicating operators aren’t confident of a positive outcome at the moment.
Notwithstanding the pessimism that saw F gave up most of its gains from its May lows, F could still bottom out at the current levels. However, I have yet to glean a bullish reversal price action that could underpin a robust bottoming process. In other words, price action investors could find entering at the current levels too early without a validated reversal to the upside.
Despite that, I assessed that F’s $11 support level should hold, suggesting a much-improved risk/reward profile for patient investors to return. With F’s attractive valuation, it should appeal to dip buyers who didn’t chase its attempted breakout another opportunity to buy more.
Hence, I’m prepared to maintain my bullish thesis on Ford Motor Company at the current levels, anticipating that most of the recent damage/headwinds have been reflected.
Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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