Ford Stock Vulnerable To Semiconductor Chip Shortage?

by Trefis Team
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Ford (NYSE: F) stock has risen 10%+ in the last five days. It is interesting to note that the company expects to make half of the cars and trucks in Q2 2021, versus its planned levels. The company has an outlook of producing 700K units in the current quarter, which is 50% lower than originally planned production. Ford has already lost around 200K units in Q1 (comprising 17% of the planned production in Q1) and a loss of  further 200K units (10% of planned production for the second half of the year) are expected in the second half of the year. Ford will report results of this quarter’s reality in July-August. The stock at around $14 per share, is near its all-time high that it has seen in the last twenty years. Add to that a higher inflation trend, and potential for Fed rate hikes that could weigh on auto financing. When we put this all together, we see Ford’s stock vulnerable in the near term.

Covid-19 is on a decline in the U.S. and much of the developed world. People are driving again, and keen to buy cars. So wait, why should Ford produce less?

It is the global shortage of semiconductor chips. Cars are increasingly becoming like computers on wheels – these semiconductor chips are helping drive innovation in vehicles. They aid vehicle electrification, airbag deployment, accurate mixing of fuel and air in the engine, autonomous driving aids, sensors, cell phone and communication integration. 

Ford plans to halt production across eight of its plants in North America during June, for various periods of time. The company expects the chip shortage to lower its earnings by about $2.5 billion in 2021. As per CFO Lawler, the company ended the last quarter with only 44 days of vehicle supply, way below the healthy industry norm of 60 days.

Why the shortage?

In simple economic terms, we could say there has been a supply-demand mismatch at the worst possible time.

On the demand side, when the pandemic hit in early 2020, automakers cancelled their orders for chips, in anticipation of a decline in automobile demand. With the rollout of the vaccination and removal of lockdown curbs, demand for vehicles started picking up again in early 2021, but the chips were already committed elsewhere. Customers locked in their homes last year, bought more electronic items like laptops, smartphones, and other similar gadgets, leading to a sudden demand surge during the lockdown restrictions.

On the supply side, the semiconductor industry was plagued by capacity constraints even before the pandemic. The supply cannot be grown quickly enough to match increasing demand, since the chip manufacturing facilities require both – lots of time and money to be set up. In recent years, capital expenditure by chip manufacturing companies has also been lower compared to their historical long term averages.

Why should this concern us as investors?

The global chip shortage has forced auto makers to put production on hold, costing the industry billions of dollars of revenue losses. Automotive stocks have witnessed growth in 2021 thus far, but this has been driven more by the declining number of Covid-19 cases driving vehicle demand and companies posting record sales in March and April. Faced with the semiconductor chip shortage, auto companies have shut down factories, slashed vehicle production, and fired workers.

Why Ford stock may not drop near-term?

So will Ford stock drop in the near term? It is possible that our fears are overblown – there are many reasons behind it. Everyone knows about the global chip shortage and the impact it is having in the automotive industry –  it is already priced in the stock valuations. We realize that Ford is near twenty-year highs – with 0.4 times sales and recording highest ever quarterly net income of $3.3 billions in recent years – but so what? The automotive industry is undergoing large-scale changes with the increasing popularity of EVs – its market success is a tide that’s likely to lift all autos. Ford plans to spend more than $30 billion by 2025 on EVs, which it expects to account for 40% of its global sales by 2030. The company has also signed a deal with SK Innovation, to make lithium-ion batteries. The company is trying to catch up with the all EV-maker Tesla (NASDAQ:TSLA) and also other traditional peers like Volkswagen (OTCMKTS: VWAGY) and General Motors (NYSE: GM), who have already committed billions of dollars for the electrification of their vehicles. Here is a comparison of relative auto valuations.

The unprecedented spending by both lawmakers and the Federal Reserve, in order to ward off the Covid-19 induced market crash, has driven stocks to new highs. All the extra money circulating gives rise to inflation fears and a possible drop in the S&P 500 in the coming months. 

Is there a light at the end of the tunnel?

The White House has prioritized increasing domestic chip production, with plans to invest $50 billion in semiconductor manufacturing and research under a $2 trillion infrastructure plan. Additionally, chip makers have announced plans of spending billions on new capacity, though it is a time consuming process. Taiwan Semiconductor Manufacturing Company, the world’s biggest contract chipmaker – controlling 84% of the chip market – plans to spend $30 billion on new capacity in 2021. Samsung Electronics and Intel have allocated capacity additions to the tune of $28 billion and $20 billion, respectively.

The shortage situation should get better in the later half of 2021, with better alignment of product shipments and consumer demand, and a much more balanced situation in the next calendar year. The problem was not created in one day and is unlikely to go away that quickly,  either.

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While Ford stock may have moved, it is helpful to see how its peers stack up. Check out Ford Peer Comparisons to see how Ford compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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