Ford Stock (NYSE:F)
The price of electric vehicles is falling, but not nearly quickly enough to allow traditional auto manufacturers to maintain their current profit margins. According to one Wall Street bear, this transforms the long-term profitability of electric vehicles into a “critical risk” for traditional automobile manufacturers.
On Wednesday, the analyst at Wells Fargo named Colin Langan updated his cost analysis contrasting vehicles powered by internal combustion engines, also known as ICEs, with battery-electric vehicles, abbreviated as BEVs.
The previous version was outdated because a lot of new information is now available. To begin, the cost of lithium, which is an essential component of the lithium-ion batteries used to power BEVs, has seen a significant drop in recent years. In addition, fresh tax credits for purchasers in the United States went into effect in January. A tax credit does not lower the costs for an electric vehicle manufacturer; however, it does lower the costs for an electric vehicle purchaser. This allows an automobile manufacturer to still make a profit while producing a vehicle with higher costs.
The price of electric vehicles is, thankfully, going down. In May of 2022, when Langan ran his analysis, he came to the conclusion that the cost to construct an electric vehicle was almost $10,000 more than the cost to construct an internal combustion engine vehicle. The cost of the batteries is approximately $14,000, while the cost of the motor and battery control system is approximately $3,000 each. About $7,000 is the average price for a conventional engine and transmission.
Today, Langan believes that the cost to manufacture an electric vehicle is approximately $7,000 higher than an equivalent internal combustion engine vehicle. The most significant change is the reduction of approximately $3,000 in costs associated with each vehicle’s battery components. According to his estimation, the cost of the engine and transmission is still approximately $7,000.
In his report, he mentioned that the benefits that could result from new government investment incentives to build battery capacity in the United States could drive down the costs of component batteries by approximately $2,700. When combined with the purchase tax credits of $7,500 that were included in the act to reduce inflation, battery electric vehicles (BEVs) may end up having an advantage over internal combustion engine (ICE) vehicles in the future.
However, Langan believes that higher lithium prices in the future could reduce the competitive advantage that they currently enjoy. In addition to this, he is uncertain regarding the continued existence of buyer tax credits.
According to Langan had written, “The United States Congressional Budget Office budget estimated that IRA BEV benefits will cost approximately $40 billion from 2023 to 2031.” “However, we estimate that the cost would be greater than $250 billion, as 67% of U.S. sales will need to be BEV by 2032 in order to comply with EPA rules.” According to him, the Republicans have already incorporated spending reductions for the IRA and EV into their new budget.
According to estimates provided by Langan, the operating profit margins of automobile manufacturers in 2022 were approximately 7.3%, which translated to a profit of approximately $2,500 per vehicle. Because the cost of EVs is estimated to be seven thousand dollars higher than the cost of ICE vehicles, he is unsure whether or not profit margins can be maintained.
The difficulty in making a profit from electric vehicles is one of the reasons he recommends selling shares of Ford Motor and General Motors. His objective for the price of Ford stock is $10. It is $30 for General Motors.
Langan is a bear. According to FactSet’s research, his price targets for Ford and GM shares are the lowest of anyone else. Some people on Wall Street have a more optimistic outlook. The price target that most analysts have set for Ford stock is approximately $13.50. The price target that most analysts have set for GM stock is approximately $46.
On Wednesday, Ford stock finished the day at $11.87, up 0.1%, while GM’s stock finished at $33.08, down 0.6%.
When looking at the big picture, approximately 33% of analysts covering Ford stock rate shares as Buy, while approximately 56% of analysts covering GM stock rate shares as Buy. About 53% of the stocks included in the S&P 500 have Buy ratings assigned to them on average.
Naturally, automobile manufacturers think there is potential for profit in the sale of electric vehicles (EVs). Ford’s objective for its electric vehicle (EV) business is to achieve an 8% operating profit margin ratio by the year 2026. GM forecasts that its electric vehicle (EV) business will turn a profit in 2025.
Scale, or the process of increasing production while maintaining the same number of facilities, is largely responsible for the improvement in projections. However, Langan’s per-unit cost gaps would continue to exist if the automobile manufacturers did nothing to address them.
They are making an effort. The price of batteries is expected to drop by 40–50% by the middle of this decade, according to estimates from the automotive industry. The decreases are the result of the company starting its own battery manufacturing capacity as well as improving its production technology.
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