Ford Stock (NYSE:F)
The most crucial question facing Ford Motor right now is: How big will it’s traditional automobile business be after switching to EVs? Investors may be able to find the answer with the aid of the brand-new data Ford Motor provided regarding its electric vehicles.
Ford (NYSE:F) held a teach-in to go over its new financial reporting structure on Thursday. The company is now disclosing data on three business segments rather than just one: its traditional automobile business, known as Blue; its professional customer business, known as Pro; and its quickly expanding electric vehicle business, known as Model e.
Ford revised its 2021 and 2022 financial results in advance of the event to reflect its new segmentation and reaffirmed its 2023 operating profit projection of $9 billion to $11 billion. In 2022, Ford’s operating profit was $10.4 billion.
Ford’s Model E EV division lost $2.1 billion and $900 million respectively in 2022. The loss in 2023 is predicted by management to be around $3 billion. These losses aren’t shocking because Tesla (NASDAQ:TSLA) also suffered losses when its EV company was roughly the same size as Ford.
In 2022, Ford sold about 61,000 EVs domestically and over 96,000 globally.
According to the corporation, Ford’s Model e division experienced operational profit margins of about -40% in 2022. Throughout 2015 and 2016, when Tesla was on a similar scale in the U.S., it was generating operational profit margins that ranged from negative 15% to 0%, net of sales and regulatory credits.
Ford sells three models and manufactures the majority of its EVs at two facilities, one in Mexico and the other in Michigan. Tesla sold two vehicles, the Model S and X, both of which were based on the same vehicle platform, in 2015 and 2016, out of a single factory.
Ford’s EV profitability seems about right overall. Moreover, Ford’s estimate suggests that its losses per EV will decrease from 2022 to 2023. That is how it ought to be.
Some people disagree. Louis Navellier, a market strategist, stated on Thursday that Ford is “struggling” to turn a profit and that its outcomes indicate Rivian Automotive (NASDAQ:RIVN) losses won’t decline as investors had hoped.
That is a rather pessimistic view. The auto industry operates on a large scale. When more vehicles leave production plants for sale, automakers profit. When Tesla began to turn a profit on a steady basis, it was shipping approximately 400,000 cars annually. In 2023, Rivian delivered roughly 20,000 units to clients.
Ford’s 2022 and 2023 EV losses are less than Emmanuel Rosner, a Deutsche Bank analyst, had predicted. Crucially, the manager stated that this year, the company’s contribution margin for its first generation of EVs is anticipated to approach break-even.
The operating profit margin or even gross profit margin is not the same as the contribution margin. In essence, variable costs like raw materials and selling charges are compared to sales. Another statistic Ford uses to show that EV profitability is increasing is break-even contribution margins. To eventually reach its profit objectives, it will have to reduce variable costs. Ford intends to do that and notes, for example, that battery costs should decrease by 10% to 15% over time.
The electric Transit van, Mustang Mach E, and F-150 Lightning are Ford’s first-generation EVs.
Rosner is not a bull from Ford. He assigns the stock a Sell rating and an $11 price objective. Navellier doesn’t have a rating for the Ford stock.
Future Ford Model e operational profit margin targets are 8%, with the majority of the gains coming from scale, lower battery prices, and superior designs. By 2026, an 8% margin would suggest $5 billion in operating profit. In order to reach those numbers, the EV industry must expand on average between 2022 and 2026 at a rate of between 80% and 90%.
These EV numbers increased the stock. In recent trade, Ford shares were up 1.6% to $11.66. The Dow Jones Industrial Average and S&P 500 both saw gains of 1.2% and 1.0%, respectively.
Investors now have a better understanding of what the rest of Ford makes thanks to the new reporting structure. In 2023, it’s anticipated that Ford’s Model e-business would lose $3 billion, which means the company as a whole will make around $13 billion.
It will come in part from Ford’s credit department. The recast financials and guidance, however, demonstrate that Ford’s core auto industry is improving year after year. Ford Blue generated earnings of roughly $3.3 billion in 2021, and $6.8 billion in 2022, and is expected to generate earnings of over $8 billion in 2023. The precise amount is difficult to determine and necessitates assuming earnings at Ford Pro and Ford Credit.
Operating profit margins for Ford Pro were 6.2% and 6.6%, respectively, in 2021 and 2022. Ford Pro does not have its own manufacturer; instead, it purchases automobiles from Blue and Model E.
A crucial thing for investors to think about is what Ford Blue will make as the company’s EV business grows. During the past 40 years, that has perhaps been the most significant question facing the sector. It’s a new one, too: Before EVs upended the market, the question was whether Ford and its US competitors could hold onto market share in the face of foreign competition.
Ford Blue’s overall operating profit might exceed $18 billion if it continues to earn at 2023 levels in 2026. The $10.4 billion the business made in 2022 set a post-financial crisis record.
Ford stock would not trade for the present seven times per-share earnings anticipated for the upcoming year if operating profit were to increase by around 80% in three years. The multiple demonstrates that investors are still unsure of what the total profits will be in 2026. There are far too many unanswered questions, such as whether the EV industry can expand as anticipated and turn a profit as the corporation intends.
The price of Ford stock has decreased by nearly 33% during the previous 12 months as of Thursday’s trade. At the same time period, the S&P 500 and Dow Jones Industrial Average both had declines of about 12% and 7%, respectively.
Over the past year, automotive stocks have underperformed. Vehicle affordability has decreased due to rising interest rates and inflation, which has weighed on investor sentiment and demand.
Featured Image: Unsplash @ FourFour