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?
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.
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.
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.
On the other side, Tesla’s (NASDAQ:TSLA) 2022 P/E ratio is overstretched, with a ratio of 115x, whereas the electric vehicle’s EV/EBITDA stands a 51.1x. Nevertheless, if we look at traditional automakers that are also adding EV production capacity, GM (NYSE:GM) trades at a discount in terms of 2022 P/E, with a ratio of 7.76x, whereas Volkswagen is nearly twice as devaluated as F stock, exchanging at only 5.74x of its 2022e P/E.
I See More Downside Than Upside in F Stock
Ford Motor will release its Q4 2021 earnings report on Feb. 3. In the last three quarters, the automaker beat analysts’ earnings and revenue estimates. This constructive streak is likely to continue, as the company posted in its mid-January release and pointed out strong Q4 sales figures in China, which were up 11.9% quarter-on-quarter to 167,000 units.
Yet recently, concerns about rising interest rates have weighed on F’s stock performance, which is not surprising given Ford’s excessive leverage ratio. In my opinion, these headwinds are likely to endure in the near term, as investors turn towards companies with strong pricing power. Besides, F stock is trading at a premium compared to its traditional automotive peers, indicating that the stock’s correction might not be over. Last but not least, semiconductor supply constraints should linger in 2022, weighing on Ford’s operations and stock valuation.
On the date of publication, Cristian Docan did not have (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.
Cristian Docan, a contributor for InvestorPlace.com, has been writing stock market-related articles for Seeking Alpha, Stocknews, and Wealthpop since 2017. He takes a fundamental and technical approach in evaluating stocks for readers, focusing on momentum investing and macro-driven strategies.