Investing.com -- Ford Motor Co . (NYSE:F) and its subsidiary, Ford Motor Credit Co. LLC, have had their outlook revised to negative at S&P Global due to weaker-than-expected profitability prospects, despite affirming their 'BBB-' long-term issuer credit rating and 'A-3' short-term rating. The revision comes as Ford's EBITDA margins are expected to remain below 8% through 2026, a decrease from the previously stated target, due to slower progress on cost reduction, increasing pricing pressure, and sustained losses in its electric vehicle (Model E) business.
As of Dec. 31, 2024, Ford had cash balances of about $29 billion and overall liquidity of around $47 billion, indicating a strong financial flexibility to compete in its highly cyclical and disruption-prone end-markets. However, the negative outlook reflects increased risk of a downgrade over the next 12-24 months if cost reduction does not materialize amid broader industry challenges such as portfolio transition risk, slow demand growth, and potentially higher costs from U.S. import tariffs.
The automaker's earnings in 2024 and its guidance for weaker earnings in 2025 point to insufficient progress on cost-reduction relative to prior expectations. Most of the company's cost gap versus competition comes from warranty related defects, quality issues on supplier parts, higher complexity, and related manufacturing inefficiencies. Rising competition and a slowdown in demand in its daily rental business also pose challenges for Ford, along with costs related to launch activity at Ford’s major U.S. assembly plants in 2025 and slower reduction of losses in its Model E business.
In terms of electric vehicles, Ford's investments are expected to dilute cash flows until 2026 due to the slow increase in industry EV volumes. Despite moderate success in its three EV launches (F-150 Lightning, Mach-E, and E-Transit), uncertainties around the extension of tax credits and slower-than-expected adoption rate for EVs introduce potential for expensive strategic missteps for the industry.
Ford’s free operating cash flow (FOCF) to sales conversion will face pressure in 2025 and 2026 after sustaining better metrics than most peers in recent years. Higher working capital investments, ongoing cash restructuring, and capital expenditure requirements will reduce its FOCF compared to the past three years. As a result, it is expected that Ford's FOCF to sales will decrease below 2% in 2025 and 2026, after exceeding 3% in recent years.
Despite these challenges, Ford is expected to maintain strong liquidity with cash balances well above its stated target of $20 billion, which will help provide financial flexibility against demand and pricing volatility. Ford's captive finance subsidiary, Ford Motor Credit Co. LLC, has consistently demonstrated top-tier operating performance, which strengthens Ford's competitive advantage.
The negative outlook reflects the increased risk of a downgrade over the next 12-24 months if cost reduction does not materialize amid broader industry challenges. However, the outlook could be revised to stable if Ford's EBITDA margins approach 8% on a sustained basis with FOCF to sales in line with higher-rated peers. This is likely to occur only upon demonstration of aggressive cost reduction and sustained pricing power in its core truck portfolio across Ford Blue and Ford Pro, along with demonstration of a path to break-even EBIT in its Model E segment.
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