The car business is tough, and now with autonomous driving right around the corner, every automobile maker will need to spend money to keep up with tech innovations. The difference is that Ford already knows how to budget and it’s profitable.
Of course, so are all the major manufacturers outside of Tesla (TSLA, Financial), and a big reason is history. Over the last decade, Toyota (TM, Financial) and Honda (HMC, Financial) documented net shareholder losses, General Motors (GM, Financial) eked out a 3% gain, but Ford (F, Financial) held its own, actually outpacing the Standard & Poor's 500 until just a year ago.
In that time, sales (after initially dipping) have grown from $116 billion in 2009 to more than $153 billion in the last 12 months, helping the company produce close to $60 billion in net income. The current market cap is $43 billion, a long way up from the start of 2009, when some people were writing the company off at $1.94 per share.
Where the company has done a great job is increasing book value from a negative 2.34 to over 8 per share and keeping its free cash flow exceptionally high. Free cash flow came in at $12.8 billion last year. This year, Ford will pay out over 5% in dividends; over time, this payout should continue to grow.
Short term the story hasn’t been great. Ford’s total sales fell 7.5% year over year including a decline of 26.4% in fleet sales and 19.4% in car segment sales. The company’s SUV volume rose 2.2% while trucks fell 7.1%. The F-Series did well (again) with sales up 5.8% and pricing up $2,500 per unit to $45,000 on average. The F-series remains the best-selling vehicle in America, but it’s hard to imagine that truck going electric. And outside of Tesla, electric cars are still not too popular, but that could change real fast.
Ford will be ready for it through building more models on common platforms for better economies of scale. Last year, Ford had 99% of its global production from nine core platforms: five global and four regional. This move to nine platforms from 12 in 2015 and down from 27 in 2007 has helped the company switch production faster to meet changing demand while drastically cutting costs. This change will also save Ford billions of dollars in development costs as it starts switching to electric and autonomous vehicles.
The rumor mill has Apple working on “the mother of all AI projects,” indicating that the company is “focusing on autonomous systems," which would really be interesting as long as it doesn’t build the whole car, too. It has enough cash to throw money at this until it gets it right, but while your iPhone costs $400 to $1,000, an automotive system may be much more valuable (and pricey) to Ford. In the next 10 years, the company is likely to produce similar if not better results. The debt pile is mostly tied to its credit business, which is the most profitable part of the company. Most car companies are both manufacturers and lenders. As a portion of total debt, its automotive side is around 15%, and it has $28 billion in cash to finance new innovation or strategic partnerships.
Car prices rise with inflation, but so do parts. Financing options have gotten even better, and while there’s still cheap Federal Reserve money out there, people will continue to upgrade to new cars. Ford makes some of the most sought-after cars on the market (e.g., Mustang, F-150) and with the stock down 10% year to date, it’s worth buying or dollar cost averaging.
Disclosure: I am not long/short any stock mentioned in this article.
