Ford Stock Analysis: Can a Hybrid Shift Overcome EV Growing Pains?

Stock Market

Ford (NYSE:F) delivered respectable first-quarter results that missed Wall Street’s top line expectations and beat bottom-line forecasts. The automaker also kept its full-year guidance in place, leaving the market holding its breath about where Ford stock heads next.

The auto industry isn’t running as strong as it once was, and government electric vehicle mandates keep undermining carmakers’ progress. The market for EVs isn’t anywhere near as big as starry-eyed analysts and politicians once believed and it is leading to wasteful, loss inducing operations.

While Ford needs to put a smiley face on its EV efforts to satisfy regulators, it also puts more resources into gasoline-powered engines. That bodes well for Ford stock as consumers want the reliability the internal combustion engine brings. They are also more profitable vehicles, which will hasten Ford’s ongoing turnaround.

Shifting Gears on EVs

Ford delivered $42.8 billion in first-quarter revenue, just shy of analyst expectations of $42.9 billion. Earnings of 49 cents per share easily beat forecasts of 43 cents but were down 22% from the year-ago period. 

Management reiterated its full-year guidance for operating profits between $10 billion to $12 billion but expects to generate $6.5 billion to $7.5 billion in free cash flow, slightly above its previous outlook for $6 billion to $7 billion. That is because Ford is backing away from its full battery-electric vehicles and building more hybrids.

Toyota Motors (NYSE:TM) is carrying the entire auto industry. It saw a massive 20% jump in sales volume in the first quarter as hybrid vehicle sales continued stealing from the competition.

Toyota guessed early on that BEVs were a horrible choice to go all-in on, so it chose hybrids instead that gave buyers the gasoline-powered reliability they were looking for while giving a green sheen to the purchase.

Electrified vehicles (yes, Toyota makes a few BEVs) now account for 36.6% of its total sales. Ford, General Motors (NYSE:GM) and other car manufacturers saw the light.

Ford said in its full-year outlook that its “commitment to capital discipline and efficiency … match investments in support of electric vehicles to revised expectations for the pace of EV adoption by customers.” Basically, buyers don’t want ’em and we’re not building ’em. At least not as many as before.

Adopting a Hybrid Model

Ford’s hybrid sales were up 36% in Q1 and are on track for 40% growth over the full year. The Maverick is the country’s bestselling hybrid truck, and Ford is now also delivering full-size hybrid trucks to customers. Ford says it is committed to making hybrid versions of every vehicle it produces in North America by the end of the decade. 

Its lineup of three-row BEVs has also been pushed back from a 2025 launch to 2027. Basically, Ford is waiting for new battery technology to catch up to market demands before sinking more money into their development.

The Model E segment, which houses Ford’s BEV business, saw revenue fall for the quarter while producing $1.3 billion in operating losses.

Ford maintains costs will ease as the year progresses, but the top line will continue to suffer. In the meantime, it will be full steam ahead on hybrids. Lesson learned!

The Bottom Line on Ford Stock

The auto industry is slowing down. April new vehicle sales finished below expectations despite the big sales gains from Toyota and its Lexus division. Sales only looked as good as they did because of Toyota. Full-year sales run rate of 15.7 million was up 0.4% from last year but was below expectations.

Notably, dealer lot inventory was 50% higher this year than it was a year ago. While that speaks to the shortages that plagued the industry finally easing (even as they padded automaker profits), it means sales should have been much higher.

The higher-for-longer interest rate policies of the Federal Reserve could weigh heavily on auto sales. Making financing more expensive is not a sales booster.

Ford is also losing sales to foreign rivals, notably Toyota. It’s reminiscent of how Japan’s automakers beat Detroit in the 1980s by giving drivers fuel-efficient cars when U.S. manufacturers were producing gas guzzlers.

Now they’re giving them more desirable hybrid vehicles while Detroit clings to BEVs.

Higher costs from interest rates and resurgent labor unions will also undermine Ford’s turnaround. The automaker is learning some lessons pretty quickly, but it won’t see a full recovery for many years yet as a result. Investors might want to wait before getting in the driver’s seat.

On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.

Articles You May Like

3 Stocks to Buy Before Warren Buffett’s Next Big Move North of the Border
3 Stocks Set for Decade-Long Gains Amid Market Weakness
Spinoff Speed Demons: How Much Further Can These 3 Stocks Run?
Playing Catch Up: 3 Tech Stocks Being Left Behind By the AI Boom
From Zero to Hero: 3 Stocks Poised for an Epic Rebound