Here’s why UBS’s downgrade of Ford is misguided — and late

By Eduardo Saverin On Oct 11, 2022

Ford Motor (F) shares plummeted Monday after UBS downgraded the Club holding — a call that strikes us as both belated and short-sighted given the stock’s considerable slide since January. With a dividend yield north of 5%, the Club is sitting tight. In a research note to clients, the bank warned that automakers like Ford and competitor General Motors (GM) are at risk of seeing their margins and earnings plummet next year, as recovering inventories and weaker consumer demand bring the industry into oversupply. As a result, UBS analysts lowered their rating on Ford to sell from neutral, while cutting their price target to $10 a share from $13 a share. The market took note, as Ford quickly found itself one of the biggest losers in the S & P 500 on Monday. Ford shares were down roughly 7.7%, at $11.26 a share, in midday trading. Keep in mind: Ford was not the sole subject of UBS’s note. Taking an overall industry view, the analysts updated price targets, ratings and earnings outlooks for both original equipment manufacturers — including Ford, GM and Volkswagen — and automotive suppliers such as Continental and Faurecia . Details on the downgrade For much of the Covid-19 pandemic, Ford and its peers have struggled to build enough cars to meet demand — the result of various supply-chain problems like semiconductor shortages. While chip availability is generally improving, UBS believes global auto production will register “zero growth” in 2023. “Demand destruction is no longer a vague risk, but has started to become a reality,” the analysts wrote. “Besides all the negative macro indicators, snippets like growing U.S. dealer inventories, weak used car prices, used car dealer profit warnings (CarMax) and our channel checks about deteriorating order intake and shorter delivery times for new cars are making us more cautious,” they explained. The firm is particularly worried about earnings at a time of improving vehicle availability amid softer buyer interest. Consequentially, it might not take long for an “oversupply” to develop, the analysts warned, “which will put an abrupt end to a 3-year phase of unprecedented OEM pricing power and margins.” That robust pricing power and expanding margins were the result of a limited supply of vehicles, healthy consumer interest and cheap credit that peaked during the pandemic. In 2023, UBS sees the operating margins of OEMs falling 400 basis points, or 4%, on an aggregate basis and overall per-share earnings declining by roughly 50% year-over-year. For Ford, specifically, UBS now estimates the automaker’s adjusted earnings before interest and taxes (EBIT) margin to fall to 2.9% in 2023, a 460 basis-point decline. The firm cut its EPS forecast by 61%, to 52 cents per share. These revised figures factor in significant revenue headwinds related to pricing and inventory mix. This essentially means UBS thinks Ford will no longer be able to pass on increased costs as easily as it did in recent years, while consumers may need to buy less profitable vehicle models due to economic pressures. The Club take With Monday’s UBS call, it’s important to not only consider what the analysts are saying, but when they’re saying it. As long-term Ford believers, we’re paying attention to both — especially the fact that Ford shares entered Monday’s session down roughly 41% year-to-date. Stocks are forward-looking assets, and investors have spent months worrying about how a potential recession would hurt cyclical industries like autos. For that reason, we think a lot of the bad news UBS is tracking may already be reflected in Ford’s stock price. Monday’s steep slide clearly shows shares can fall further, but we think UBS is too late to the game in waving the sell flag. Before we got here Monday, we’d made a number of timely Ford sales earlier this year at higher prices — including 1,750 shares on Jan. 18 , at $24.46 apiece, and 910 on April 6 , at $15.39 each. Both sales generated sizable profits for the Club, and the one in April was because we were explicitly worried about what an economic slowdown could do to Ford’s business. That context is helpful in understanding why we’re not heeding UBS’s call and heading for the exit. With the stock now carrying a dividend yield north of 5% and having profitably trimmed our position months ago, we can afford to be patient. We’re not buyers just yet and are hesitant to upgrade our rating on the stock to a 1 — our “buy-it-here” designation — until we gain more confidence in management’s ability to deliver on its profit outlook. Ford’s third-quarter earnings, which are set to be released Oct. 26, are an important near-term event. The company has already warned about inflationary pressures and supply-chain disruptions impacting results. However, we’re closely awaiting the full print and management’s commentary on the earnings conference call to get a better sense of the company’s outlook into 2023. (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 Co. signage at the Washington Auto Show in Washington, D.C., Jan. 21, 2022.

Al Drago | Bloomberg | Getty Images

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