The Detroit automaker's shares sank by a double-digit percentage after management said parts shortages would hurt its third-quarter results.
Shares of automaker Ford Motor Company (F) were crushed after management said that its third-quarter profit will take a hit due to parts shortages that are expected to leave about 40,000 to 45,000 near-complete vehicles sitting around at the end of the quarter. With its shares already looking cheap before this sharp decline, is this a buying opportunity forinvestors?
Sure, Ford may be facing some unexpected near-term challenges. But investors willing to look beyond the quarter have good reason to consider buying into theautomakerat this discounted valuation. After all, management did reiterate its full-year target for adjusted earnings before interest and taxes (EBIT). This suggests that Ford's current issues will likely be resolved in the fairly near future.
Temporary challenges
Not only will Ford wrap up its third quarter with 40,000 to 45,000 vehicles "lacking certain parts presently in short supply," according to management's update on Monday afternoon, but these "vehicles on wheels," as Ford refers to them, are disproportionately skewed toward "high demand, high margin models of popular trucks and SUVs."
Adding to its difficulties, Ford said inflation-related supply costs during the quarter will be $1 billion higher than anticipated.
But the silver lining in the update was that management still views these challenges as temporary headwinds. "Ford again affirmed its expectation for full-year 2022 adjusted earnings before interest and taxes of between $11.5 billion to $12.5 billion," the company said in its press release, "despite limits on availability of certain parts as well as higher payments made to suppliers to account for the effects of inflation."
Reading between the lines, there are two encouraging items in this report. First, Ford's high-margin vehicles remain in high demand. Second, the company expects full-year adjusted EBIT to hit the company's previously stated target despite inflation-related supply costs running $1 billion higher than anticipated in Q3. These two facts combine to suggest that management has strong and optimistic visibility into the rest of the year.
An attractive long-term risk-reward profile
After Ford stock's slide on Tuesday, the stock is looking extremely cheap. The automaker now trades at less than 5 times the midpoint of management's full-year adjusted EBIT forecast. In addition, while they wait for a stock rebound, investors will get to collect an attractive dividend that, at the current share price, yields 4%.
If global supply chain issues improve and automotive production picks back up, there's good reason to believe that Ford's sales could surge higher -- at least, that's what is suggested by management's commentary. Of course, strong demand for its lucrative trucks and SUVs could send the company's revenue and earnings soaring if global supply chain challenges dissipate.
But even if the state of the global automotive industry remains dire, the market has arguably priced that challenging environment into Ford's shares. As such, this pullback looks like a great opportunity for long-term investors to scoop up some shares. They'll likely be rewarded handsomely over the long haul.
Source: The Motley Fool
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