Ford Motor Co. (F, Financial) operates under the Ford and Lincoln brands, producing a wide range of vehicles, including internal combustion engine, hybrid and electric models. Additionally, the company offers service parts, accessories and digital services primarily through dealership sales channels.
The company's business is structured into four main segments. The first is Ford Blue, which handles the sales of ICE and hybrid vehicles along with their parts and accessories. Second is Ford Model e, which focuses on the development and sales of electric vehicles and their components. Ford Pro caters to the commercial, government and rental markets, while Ford Credit functions as the financial arm, generating earnings through vehicle leases and financing for customers at dealerships, which comprises most of its debt.
Figure 1: Ford's revenue composition (2023)
Ford's strategy aims to cover all customer preferences by offering a diverse lineup that includes ICE, hybrid and EVs. However, even if the automaker successfully competes in these markets and maintains its share as EVs become more popular, it will likely do so with thinner margins (currently failing to compete; margins are highly unfavorable).
Macro and industry factors
As a mature and established auto brand, Ford's returns are significantly influenced by external factors, particularly those impacting the U.S., where it makes the majority of its sales. Additionally, sales in Canada and Western Europe are important, given their correlation with U.S. market trends. However, Ford's presence in Asian markets is relatively limited, with recent trends showing declining sales in China and minimal exposure overall to this region. Although data suggests the Chinese market and other Asian markets are the primary growth drivers over the next few years, Ford has little to no exposure to them. With the competitive landscape of the auto industry evolving significantly over time, Ford's market share in its home markets have steadily declined as well, marking a big red flag in my books.
Its market share dropped from the 20% to 25% range in the previous few decades to as low as 13% in 2023. This decline reflects the growing dominance of foreign automakers such as Toyota (TM, Financial), Honda (HMC, Financial) and Volkswagen (XTER:VOW3, Financial), which have firmly established a new competitive paradigm. Consequently, Ford now faces the challenge of competing more aggressively to maintain its position than it did in decades past.
Figure 2: Ford's U.S. market share is trending down amid foreign competition
Source: Statista
Ford cuts back EV investments as a result of weak demand
The competition in the EV market is becoming increasingly fierce, particularly with the entry of Chinese and other Asia-based manufacturers offering more affordable models than Tesla (TSLA, Financial) in terms of both features and quality. Although EVs have not historically been Ford's primary focus, its significant investments in the EV space began in 2009 with the introduction of the Focus Electric. However, the high cost and lack of infrastructure posed major challenges, which still remain to this day.
Recently, Ford renewed its commitment to EVs by establishing the Ford Model e segment. This division sold approximately 10,000 EVs in the first quarter, but faced substantial financial losses, amounting to $132,000 per vehicle, resulting in a total loss of $1.30 billion. For 2024, the division is expected to incur adjusted Ebit losses of between $5 billion and $5.50 billion, highlighting ongoing difficulties in achieving profitable growth in the EV sector. In 2023, the division had already reported a $4.70 billion Ebit loss while selling 116,000 EVs, significantly impacting overall earnings in the first quarter (the segment pushed overall earnings down 20% in the first quarter).
Figure 3: Ford Model e segment's profitability struggles continue
Source: Ford Investor Relations
In late 2023, Ford announced a delay in $12 billion of planned EV investments. In February of this year, management revealed it is reassessing its EV battery strategy. The overall consumer demand for EVs appears to have slowed, influenced by rising interest rates and waning initial excitement, further exacerbating Ford's EV profitability issues.
In the current market environment, consumers are showing renewed interest in a more diverse mix of vehicles, including ICEs and hybrids, even as the long-term trend toward electrification and net-zero emissions continues. Reflecting these market changes, legacy automakers have adjusted their strategies. Ford announced it would scale back production of its electric pickups, a move echoed by GM (GM, Financial) and other automakers.
Key financials
Although the company's top-line revenue appears to be increasing, primarily driven by the Ford Blue segment, there are concerning trends regarding its gross margins. After recovering from the 2020 pandemic dip to levels surpassing those seen before the pandemic, Ford's margins began to decline again. This downward trend indicates issues with pricing power and overall market competitiveness. The shrinking market share may have played a role in this margin compression, alongside the impact of elevated interest rates.
Figure 4: Gross profit and gross margin performance (2020 to 2023)
Source: Ford Investor Relations
Additionally, the continued substantial losses in the EV segment have exacerbated overall profitability challenges as well. The elevated interest rate environment is also leading consumers to become more hesitant to finance vehicle purchases, forcing Ford to ramp up budgets for customer incentives, further squeezing its margins in the near term.
Figure 5: Segmental margin performance (Fourth-quarter 2022 to first-quarter 2024)
Source: Ford Investor Relations
Regarding its debt position, Ford indeed carries a substantial amount of debt. As of December 2023, the company reported $49 billion in current debt and nearly $100 billion in long-term debt. However, it iss crucial to understand the context of this debt. A majority of it belongs to Ford Credit, the company's financing arm, rather than the operational business. Specifically, $49 billion of the current debt and $80 billion of the long-term debt are attributed to this business. This means Ford Credit's debt must be evaluated separately from the auto manufacturing business, and evaluated as more of a bank or financial institution.
Figure 6: Sufficient liquidity position to cover debt balances
Source: Ford Investor Relations
Ford Credit's primary function is to raise funds through debt to finance consumer purchases of vehicles. Consequently, while the debt figures might appear alarming, Ford Credit holds substantial assets in the form of loans and leases due from consumers. As of December 2023, the financing arm had $56 billion in short-term loans receivable from consumers and $49 billion in current debt obligations. This large amount of receivables significantly mitigates the impact of the debt.
As of first-quarter 2024, Ford Credit's assets, combined with the company's liquid position of approximately $35 billion, total about $157 billion against around $150 billion in debt. Ford has maintained a stable balance sheet and continues to grow its book value with retained earnings.
Investment thesis
Historically, Ford's stock has rarely fluctuated beyond the $10 to $20 range. At its current price of around $12, the key question is whether this valuation accurately reflects the company's future potential. While there are encouraging signs, such as Ford's strategic decision to temporarily scale back on EV production to focus on its traditional segments, there are also concerns, like declining gross margins and market share, that raise red flags. The EV production scale-back may offer short-term value, but it remains uncertain if Ford can sustain competitiveness in the EV market over the long term, given the inevitable transition towards electric vehicles despite short-term demand fluctuations.
One positive aspect is Ford's current yield, just below 5%, which is decent, although the inconsistent dividend payments may deter income investors and highlight the stock's cyclical nature. Additionally, the structural de-rating of pure-play EV stocks has shifted some investor focus towards legacy automakers like Ford, benefiting from their comparatively stable profitability.
Figure 7: Ford's relative valuation
Source: valueinvesting.io
Nevertheless, I do not believe Ford is attractive at this time, given that its market price of $12.16 is closely aligned with its fair price of $11.73 (overvaluation of 3.60%). The trailing price-earnings ratio of 12.40 is above the industry median of 9.50, suggesting a slight overvaluation on a trailing basis, whereas the forward earnings multiple of 7.70, below the industry median of 8.90, indicates potential earnings growth. Given these valuation metrics, which show no significant deviations from market prices, there are no evident momentum plays for Ford here. However, I recommend closely monitoring the company's progress in the EV market. A significant improvement in profitability and a clear strategy for investment and market penetration in the EV segment could potentially warrant a future rating upgrade.
Final thoughts
To wrap up, the market seems reluctant to assign a higher valuation to the stock, even with the current dividend yield of nearly 5%. Further, by steering clear of heavy investments in EVs, Ford may be making the right move for now to stabilize its short-term financials, though the long-term implications remain uncertain.
I will continue to monitor Ford's situation closely, particularly any reversals in its market position and progress in the EV sector. Any significant improvements in these areas could lead to potential changes in the investment thesis, especially if it can capitalize on shifts in market demand for electric vehicles.
