Stocks, and stock valuations, of traditional auto makers have been languishing. Investors just aren’t sure they can make it in an all, or mostly all, electric world.
Ford Motor
on Monday laid out a bold vision to allay those concerns. It didn’t work.
The auto maker, which celebrates its 120th birthday in June, hosted its 2023 “Capital Markets Day” in Dearborn, Mich. Management presented a lot of new detail for investors to digest, much of it positive. Still, the stock was falling Monday, down 1.5%. The S&P 500 rose 0.1%, while the Dow Jones Industrial Average declined 0.2%.
Here are five things to focus on, along with some recent history.
Profits Plus Growth = Better Valuation
Ford’s goal is to produce a 10% operating profit in 2026 while selling roughly 5.6 million units, including roughly 1 million or so electric vehicles.
That would work out to some $20 billion in operating profit, based on Barron’s reading of all of Ford’s numbers. That works out to average annual growth of about 25% a year, on average. Growth like that would imply that Ford deserves a price-to-earnings ratio a lot higher than the current multiple of less than 7 times estimated 2024 earnings.
How Ford plans to make that happen includes more scale in the EV business as well as new, better designed, simpler “generation two” EVs that are coming around 2026 to replace and augment the first-generation EVs: Mustang Mach-E, E-Transit van and F-150 lightning.
There are also a lot of planned improvements in Ford’s traditional business, called Ford Blue. Lower warranty costs and less rework can add billions in profit to that business.
And the third leg of the improved profit stool is software-related sales. Ford is designing new software architecture and products it plans to sell across its installed base of cars. That includes driver assistance technology as well as productivity and uptime products used by Ford’s commercial customers.
Profit Better Than Tesla’s?
The strategy of simple, low-cost EVs and software sounds a lot like the Tesla (TSLA) strategy.
A total margin of 10% could actually be a little better than Tesla’s profit margin. Tesla recently reported an 11% operating profit margin in the first quarter of 2023, and is expected to produce an operating profit margin of about 11.7% for the full year. That’s down from a margin of about 17% produced in 2022. Tesla’s price cuts have impacted profit at the EV maker.
A margin of almost 12% is better than Ford’s but Tesla, essentially, is the deal and the gas station. It owns the largest network of fast EV chargers in the country and sells direct to the consumer. Backing that profit out could mean manufacturing-related margins are below 10%. Tesla didn’t respond to a request for comment about non-manufacturing margins.
EVs Are Getting Better
Most of the questions coming from analysts following presentations dealt with electric vehicles in one way or another. A couple of notable tidbits: Costs are coming down and charging times are getting faster.
CEO Jim Farley expects an EV to be cheaper than an equivalent gasoline-powered vehicle by 2026. That comes from lower battery costs, more efficient design and needed manufacturing scale.
He is talking upfront costs and added that EVs are cheaper to maintain and less to refuel. Gas is still more expensive than electricity.
As for charging, more than 150 miles of range from less than 10 minutes of charging was mentioned by Doug Field, Ford’s chief advanced product and technology officer, who also has spent time at
Apple
(AAPL) and Tesla.
That’s not quite the same as filling up with gasoline, but it’s getting much closer. Better design and power electronics enables more electricity to be delivered faster.
Lithium Is a Big Deal
Part of lower battery costs is having low cost, secure supplies of lithium, a key ingredient in lithium ion batteries. Ford announced four lithium supply deals Monday with all the major players including
Albemarle
(ALB),
SQM
(SQM),
Livent
(LTHM) and
Compass Minerals
(CMP).
Shares of
Albemarle,
SQM and Compass were up a little in Monday trading.
Livent
shares declined.
Smaller Is Better
Monday was one of the first events Ford has hosted since it started reporting results for the EV business, the traditional business and its commercial business.
The reorganization isn’t all about numbers, although it’s great to see how the EV business is progressing and the strength of Ford’s commercial business. The restructuring has changed Ford. “We have a much smaller Model e team,” said Lisa Drake, Ford’s vice president of industrialization for its Model e division.
Smaller size allows the Model e team to go faster and break rules in the car business “which really aren’t rules,” added Drake. “I call them urban myths inside of Ford, things that we’ve convinced ourselves [of].” That can include the way cars are designed or how fast it takes to bring a new model to market.
CEO Farley is bullish on the future. “This is like investing in
Apple
or
Samsung
in ’06, before that transition of smartphones,” he said. The auto maker’s job “is to be one of the early winners.”
With the stock down, investors are taking a wait-and-see approach. The current economic environment also has been weighing on sentiment.
Coming into Monday trading, Ford stock has been flat this year and down about 7% over the past 12 months. The S&P 500 has risen roughly 10% this year and is up about 5% over the past 12 months.
Rising interest rates have hurt vehicle affordability and sapped some investor enthusiasm for the sector. Other car stocks have struggled as well. Shares of
General Motors
(GM) and Tesla have fallen about 9% and 20% over the past 12 months, respectively.
Write to Al Root at [email protected]
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