Ford balances growth and profits in a promising quarter, keeps its stock rating

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Ford (F) will keep its stock rating after the automaker on Thursday reported quarterly beats on the top and bottom lines — even as electric vehicle losses were a bigger drag on the bottom line than expected. Automotive revenue rose about 12% year over year, to $42.43 billion, topping analysts' forecasts of $40.38 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share (EPS) pulled back 6% on an annual basis, to 68 cents, but exceeded estimates of 55 cents per share, Refinitiv data showed. Earnings before interest and taxes (EBIT) increased slightly to $3.79 billion, well ahead of analysts' predictions for EBIT of $3.16 billion. Bottom Line We had concerns after the automaker's fourth quarter of 2022 and put it in the penalty box . Fortunately, CEO Jim Farley and team delivered in the first quarter and we've stuck with the name. With Thursday's results, management shows it is playing to win and that the fourth quarter was an outlier. Sales beat expectations across major operating segments, including traditional combustible engines and next-gen electric vehicles. We will be keeping an eye on the EV losses as we must hold management to its promise of properly balancing growth with profitability. We do understand that the EV business is the equivalent of a start-up, so losses come with the territory. Strong profitability and cash flow generation overall in the second quarter provided the much-needed offset. On the call, Farley noted that first-time EV buyers don't have much loyalty, but "once a customer chooses an EV brand, they stick with that brand over time so as we make pricing decisions and assess customer acquisition costs, we're not only weighing the immediate impact on profitability but also how this translates to lifetime value of that customer." This focus on lifetime value is important, given the growing revenue stream resulting from increasingly connected vehicles, so long as management sticks to an appropriate balance of growth and profitability and doesn't change production capacity to gain market share at all costs. For that reason, we were pleased to hear the Farley say Ford "won't bear an unlimited cost to acquire those customers and build our install base." Management reiterated the commitment to target returning 40% to 50% of free cash flow to investors, so the better the result here, the better the potential for increased dividends and buybacks over time. Fortunately, the traditional internal combustion engine business continues to see strong demand that is "potentially longer and richer than most expected," Farley said. In addition to the strong results, management provided significant upward revisions to its full-year outlook, taking the bottom end of its forecasted adjusted EBIT (earnings before interest and taxes) range to a level above expectations coming into the print. Why isn't the stock up? The slight dip in after-hours trading (down about 1%) is likely because the company said it no longer expects to break even on EVs this year due to the "rapid and dynamic changes in the pricing environment." Given the price cuts announced earlier this month, we don't find that too surprising and wouldn't be sellers because of it. As a result, we reiterate our 1 rating and $16 price target. Quarterly commentary Ford Blue, which represents Ford's gas-powered and hybrid vehicles, delivered a strong quarter and was again profitable in every region in which it operates. Volumes increased 7% with broad-based regional growth. Sales at Ford Model e, the electric vehicle division, grew thanks to a 44% increase in volume versus the year-ago period. Of course, that growth was made possible by Ford's investments to increase production capacity for both the Mustang Mach-E and F-150 Lightning. However, profitability was negatively impacted by these capacity investments, along with new product initiatives and industry-wide pricing pressure. The company recently had to cut prices on the F-150. That in mind, while the EV business is a drag for now, management reiterated their commitment to a disciplined financial approach to the division with a focus on balancing growth with profitability. Ford Pro, the unit that houses the company's commercial vehicles, as well as its software and services business, saw its EBIT nearly triple thank to a combination of 8% volume growth and significant margin expansion. On the call, Farley commented, "in the quarter, volume, pricing, paid software subscriptions continued to accelerate as we capture significant pent-up demand across multiple commercial sectors and locations in both North America and in Europe." Guidance Thanks to the strong results, Ford raised its outlook for the full-year 2023, now expecting total adjusted EBIT to be in the range of $11 billion to $12 billion, up from $9 billion to $11 billion, while adjusted free cash flow should now come in the range of $6.5 billion to $7 billion, up from $6 billion. That EBIT guide outpaces the $10.8 billion expected by the Street, even at the low end, while the free cash flow guide trounces the $3.2 billion estimate. By segment, Ford expects Ford Blue to deliver full year EBIT of "about $8 billion," up from about $7 billion, and Ford Pro's EBIT to be "approaching $8 billion," up from $6 billion. Unfortunately, these increases are partially offset by an increase in the expected full-year loss at Ford Model e, which is now expected to lose about $4.5 billion in EBIT, up from the roughly $3 billion previously forecast. Management reiterated the company's commitment to delivering an 8% EBIT margin target in 2026. (Jim Cramer's Charitable Trust is long F. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. Ford Motor Company's electric F-150 Lightning on the production line at their Rouge Electric Vehicle Center in Dearborn, Michigan on September 8, 2022. Jeff Kowalsky | AFP | Getty Images