Ford’s (F) second-quarter results showed the company managed the semiconductor shortage better than it thought it would a few months ago. We are raising our fair value estimate to $20 from $17 on higher revenue growth and improved 2021 profits, a 70-basis-point increase in our midcycle EBIT margin to 5%, time value of money, and a lower cost of debt.
Adjusted diluted EPS of $0.13 beat the Refinitiv consensus of a $0.03 loss. Adjusted EBIT including mobility and Ford Credit was $1.1 billion, which declined sequentially from first quarter’s $4.8 billion. North American profit fell to $194 million from $2.9 billion as segment revenue fell by 35% and wholesale units fell 39% due to the chip shortage. Outside North America, only Europe saw a wholesale unit decline (down 35%) but total company unit volume fell by 28%. Management stressed uncertainty about when the chip shortage improves and mentioned Ford’s uniquely high exposure to chipmaker Renesas in Japan, which is recovering from a fire earlier this year. Still, we think management is optimistic about higher inventory by fourth quarter because CFO John Lawler mentioned pricing tailwinds abating in that quarter. The chip shortage will, in our view, remain a problem in 2022 but is at its worst right now.
Strong pricing power helped Ford offset lower volumes in the first half of the year and make total company adjusted EBIT of $5.9 billion despite adjusted free cash burn excluding Ford Credit of $5.5 billion. This burn is mostly due to a $6.6 billion working capital drain as Ford built mostly complete vehicles that it cannot yet sell as it’s waiting for chips. Management raised 2021 free cash flow guidance to $4 billion to $5 billion from $0.5 billion to $1.5 billion on optimism on higher volumes helping working capital improve. Second-half 2021 adjusted EBIT though is guided to $3 billion to $4 billion as volume improvements will be less than headwinds such as $2 billion in higher commodity costs relative to first half.
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