Investment Thesis

Ford's Model E segment is facing losses due to stiff competition, pricing pressure, and significant costs associated with new-generation EV development. The Ford Blue segment is also struggling, with an expected 2025 EBIT of $3.5-4 billion. Ford's overall outlook is impacted by lower volumes, a 20% production cut, and plant launch activities. The company's high Capex Needs and investments in green vehicles and self-driving cars may strain its near-term financials. Trump's 25% tariff on Mexican and Canadian imports could pose a threat to Ford's operations, increasing raw material costs and ultimately affecting sales and profits. However, Ford's Pro unit strength, strong liquidity profile, and generous dividend yield make it a promising investment. Ford's vehicle lineup, including F-series trucks, Maverick pickups, and SUV models, is impressive, and its hybrid and EV strategies are strategically positioned for long-term growth. The company's strong liquidity profile and commitment to shareholder return make it a strong investment choice.

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Investment Downsides

Ford Model e Losses: The company's Model e segment continues to struggle amid stiff competition, pricing pressure and significant costs associated with new-generation EV development. After having incurred losses of $4.7 billion in its EV business in 2023, Ford's loss from Model e widened to $5.07 billion in 2024, exacerbated by ongoing pricing pressure and increased investments in next-generation EVs. Discouragingly, the company expects segmental loss in the band of $5-5.5 billion this year.

Ford Blue Segment to Struggle: The Ford Blue division seems to be losing momentum. The company anticipates 2025 EBIT of $3.5-4 billion from the Blue segment. This implies a decline from $5.3 billion generated in 2024. Ford expects to sell fewer ICE vehicles compared to last year. Additionally, a shift in product mix and foreign exchange headwinds will drag profits.

Muted Overall Outlook: Ford expects Q1 2025 adjusted EBIT to break even, a sharp drop from $2.7 billion in Q1 and $2.1 billion in Q4 2024, due to lower volumes, a 20% production cut, and plant launch activities. Full-year adjusted EBIT is forecast at $7-$8.5 billion, down from $10.2B in 2024. Warranty costs and generous incentives will weigh on margins and overall profitability.

High Capex Needs: While Ford's massive investments in green vehicles and self-driving cars will prove beneficial in the long term, it is likely to strain its near-term financials. Ford's massive spending on modernization, including connectivity, IT and new product launches, is expected to limit cash flows. Adjusted FCF is projected in the band of $3.5-$4.5 billion, down from $6.7 billion reported in 2024.

Tariffs To Play Spoilsport: With Trump's 25% tariff on Mexican and Canadian imports, Ford's set to face challenges. The company has acknowledged that tariffs could severely disrupt its operations. Ford CEO Jim Farley warned that tariffs would bring a lot of cost and a lot of chaos to the U.S. auto industry. Notably, Ford's weak guidance doesn't even take into account any changes in policies from Trump administration. These tariffs are expected to increase raw material costs and finally translate to high cost of vehicles, thereby derailing demand and affecting sales and profits of Ford.

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Investment Upsides

Ford Pro Unit Strength: The combination of Ford Pro's strong order books, increasing demand signals and the successful launch of the all-new Super Duty sets the stage for a highly promising future for the Ford Pro segment. Continued strength across all three domains-vehicles, software and physical services- bode well. Ford's increasing focus on software technology and services business will be a major driver. Ford expects $7.5-$8 billion EBIT from the Pro segment this year. While that implies a year-over-year decline, it is still expected to be the major profit driver for the company.

Strong Liquidity Profile: Ford ended 2024 with around $28 billion in cash and roughly $47 billion in liquidity. Ford's superior liquidity profile provides a solid foundation for investment in Ford+ priorities. Encouragingly, Ford reduced net cost by $500 million in the second half of 2024 and has identified $1 billion in product design cost reductions for 2025.

Generous Dividend: Ford has a high dividend yield of more than 6%, way better than the S&P 500's yield of 1.22% on an average. The company targets distributions of 40-50% of FCF going forward, demonstrating its commitment to shareholder return. This high yield provides some buffer against the stock's volatility and could entice those seeking steady income amid uncertain market conditions.

Hybrid and EV Strategies To Aid in Long Term: Ford's vehicle lineup, supported by F-series trucks, Maverick pickup and SUV models, including Escape, Explorer, Expedition, EcoSport and Edge, is impressive. The automaker's hybrid strategy is also noteworthy. While the Model-e segment faces near-term headwinds, it is strategically positioned for robust long-term growth through a multifaceted approach. Key strategies include scaling, leveraging digital capabilities for manufacturing efficiency and emphasizing vertical integration by insourcing critical components.

Guru Activity

Portfolio Management

By integrating the stock in portfolios, money managers can put themselves in a commanding position as the stock is undervalued by 64.3%. The corporation may face short-term financial difficulty due to its large capital expenditure needs and investments in self-driving cars and green vehicles. Ford's operations may be threatened by Trump's 25% tariff on imports from Mexico and Canada, which would raise the price of raw materials and eventually have an impact on sales and profitability. Nonetheless, Ford is a good investment due to its Pro unit strength, solid liquidity profile, and high dividend yield.

This article first appeared on GuruFocus.