The last few years at Ford Motor Co. (F, Financial) have been riddled with a series of challenges, ranging from its grapples with mounting debt paired with negative free cash flows, to its grapples with volatile supply chains, high commodity costs and low equipment availability. As such, the stock faces a critical moment as it veers away from critical support.
This calls for a closer examination of the timeline of events that got it here in order to better present the reasons why I believe the shares of the company are still severely overvalued.
Hardships at Ford
During the fourth-quarter 2022 earnings conference call, Chief Financial Officer John Lawler outlined the legacy automaker's strategy to distribute 40% to 50% of free cash flow, aligning with its focus on total shareholder return. Despite achieving $10.4 billion in adjusted earnings before interest and taxes in 2022, this was significantly below the $11.5 billion to $12.5 billion target the company had laid out in its guidance for the year as challenges in the supply chain and production planning impacted results.
Lawler then acknowledged that with better management of controllable factors, Ford could have generated up to $2 billion more in adjusted EBIT, but specifically due to supply chain instability and production plan disruptions, it produced lower volumes than expected alongside increased costs due to premium freight and supplier charges during the quarter.
Responding to questions about the $2 billion guidance miss, operational mishaps and potential solutions in the first quarter of 2023, Lawler went over the key issues that caused the miss, which included volume challenges related to key commodities and equipment issues with suppliers during ramp-up.
Lawler then assured investors that the company was actively addressing these issues by implementing corrective actions for chip inflow, establishing better pipelines from brokers and collaborating closely with supply chain partners down to Tier 2 chip suppliers Mainly, the focus was on executing changes, improving operational efficiency and stabilizing production to reduce expedited costs.
The hardship persisted through 2023
Despite its best efforts, the automotive manufacturer continued to struggle in 2023.
During the third-quarter 2023 earnings call, Lawler reported a strong first three quarters with $9.4 billion in adjusted EBIT, but despite being on track for full-year guidance, uncertainties arose due to the United Automobile Workers strike, leading to its withdrawal. The strike impacted third-quarter Ebit by $100 million and reduced the production plan by 80,000 units, potentially impacting 2023 Ebit by $1.3 billion.
Regardlesss, the company's Ford+ plan and diversified portfolio exhibited resilience, with solid results from the Pro business and Ice and hybrid products offsetting electric vehicle investments. Quarterly revenue increased by 11%, reflecting a strong product lineup. However, flat wholesales resulted from supply constraints and a UAW work stoppage.
Adjusted Ebit was $2.2 billion, showing year-over-year improvement. Costs increased, emphasizing the need for ongoing efforts, particularly in warranty expense and material costs.
Adjusted free cash flow was $1.2 billion, down 66.66% year over year. Over nine months, $4.8 billion in adjusted free cash flow was generated, meeting the 51% target conversion rate.
Ford ended the quarter with over $29 billion in its cash balance and $50 billion in liquidity, including a new $4 billion contingent liquidity facility. However, this figure remains significantly lower than the years prior:
Source: macrotrends.net
Concerns were further emphasized toward the end of the earnings presentation, where a cautionary note was presented that highlighted potential challenges in credit and debt access, showcasing risks from credit rating downgrades, market volatility and regulatory factors. In addition, it also expressed concerns about sustaining a competitive cost structure, including labor constraints.
The vulnerability of the supply chain was also emphasized, with disruptions anticipated due to shortages of key components and essential raw materials like semiconductors, lithium, cobalt, nickel, graphite and manganese. Ford's strategy of multiyear commitments for raw materials exposes it to risks associated with fluctuating demand and unpredictable commodity prices.
The difficulty in accurately forecasting costs, particularly in the face of commodity price volatility, is recognized, so it is very important that Ford aims to address these challenges to maintain its competitive position.
Financial metrics
There are also some financial metrics that I find concerning, starting with Ford's ability to pay off its short-term debt. Year after year and quarter after quarter, Ford has reported having total debt that significantly towers above its total current assets. By my assessment, this signals a great deal of solvency risks when it comes to assessing the company's ability to cover its short-term obligations during the higher yield, higher interest rate and tighter credit condition environment the market currently finds itself in.
Source: tradingview.com
Ford has also been greatly impacted by the recent rise in inflation as its operating expenses increased from $131.19 billion in the first quarter of 2022 to $166.96 billion in the third quarter of 2023, representing a 35.77% increase in just under two years:
Source: macrotrends.net
In addition to rising operating expenses, the company experienced a sharp drop in net income, which fell from a high of $17.94 billion in the fourth quarter of 2021 to the low of -$1.98 billion at the end of 2022. 
Source: macrotrends.net
The sharp rise in operating expenses paired with the sharp decline in net income has been attributed to an extended period of declining free cash flows. This has resulted in annual free cash flows turning negative for the first time during 2022.
Source: tradingview.com
Lastly, Ford's debt-to-Ebitda ratio is exponentially higher than that of over 90% of its competitors. This ratio is a measure of a company's leverage, indicating how much debt it has relative to its earnings. A higher ratio suggests higher financial leverage and, consequently, a greater risk of being unable to meet its debt obligations in a timely manner. This elevated ratio raises concerns about increased insolvency risks for the company.
Technical outlook
Source: tradingview.com
During these last few years of structural and financial stress, Ford has managed to stay above the 61.8% Fibonacci Support at $12.30. But the last few months have seen it break down below this support level and now we can see it is potentially trying to confirm the level that was previously supported as it faces what looks to be the start of a bearish rejection of the $12.30 Fibonacci Support Zone, the 200-week simple moving average and the 55-week exponential moving average. If we get follow-through, I think we could see Ford come down to the price level aligning with the 0.886 Fibonacci retracement, thus putting it at around $6.50.
