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Ford Looked Electric in 2021, But Headwinds Are Building

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The automotive industry has shown remarkable resilience in recent turbulent times. The Covid-19 pandemic has stressed automotive manufacturing processes more than ever, thanks to export disruptions for needed parts and worldwide manufacturing shutdowns. One of the stocks that managed to handle these challenges well is Ford (NYSE:F). But can F stock continue this trajectory?

Ford (F) dealership sign against a blue sky.
Ford (F) dealership sign against a blue sky.

Source: D K Grove / Shutterstock.com

The U.S.-based automotive company turned in an incredible performance in 2021 and its stock price more than doubled, finishing the year at $20.77 per share. This rally continued in the first two weeks of 2022, as the F stock market capitalization advanced another 24.5%. The share price reached a 10-year high of $25.87 per share.

This strong performance has been attributable to the acceleration of Ford’s electric vehicle offerings and management’s healthy handling of supply shortages compared to its peers.

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But since then, Ford’s shares plunged more than 20%, as the whole market pulled back and investors started pricing in the impacts of rising interest rates on the company’s enormous debt.

F stock price chart from 01/2021 to 01/2022
F stock price chart from 01/2021 to 01/2022

Source: Charts by TradingView

Despite that, Ford shares dropped 4.1% year-to-date and have slightly outperformed the broader market. In the same period, the S&P 500 Index (NYSEARCA:SPY), retreated 8.8%.

F Stock’s Fundamentals Look Solid but Debt Remains High

In 2021, the automaker’s sales are expected to increase robustly, up 9.2% year-on-year to $126.8 billion, and are estimated to accelerate by 16% to $146.8 billion in 2022, corresponding to a healthy net margin of 5.12%.

Moreover, the company’s bottom line is on an upward trend. Net income is anticipated to bounce next year by 14.2% to $7.52 billion, and by 15.9% to $8.71 billion in 2023.

More interestingly, Ford has managed to reduce net debt in 2021. Net debt reached $117.1 billion in the third quarter 2021, down 5.5% quarter-on-quarter and is down 14.9% year-on-year. This bodes well for the company in this rising interest rates environment. Besides, F stock recently announced that it redeemed “more than $7.6 billion in high-cost debt in the fourth quarter,” reducing the company’s interest expense and therefore strengthening its balance sheet.

That being said, the company’s leverage ratio established at 5.89x at the end of the the third quarter, which remains high especially in this rising interest rate environment.

F Stock Valuation Is Stretched Compared to Its Peers

Compared to pure electric vehicle players of the industry, Ford’s valuation metrics look cheap. The automaker currently trades at 10.29x estimated 2022 earnings per share and at 2022 EV/EBITDA of only 5.57x.