I haven’t covered automotive producers in years for one simple reason: I wasn’t a fan of the industry. That has changed a bit as the entire industry is shifting away from low-margin mass production led by a focus on electric mobility. Major producers are scrapping cheap models, bringing new EV models to the market, and being able to charge higher prices thanks to government subsidies and because demand remains high. These developments are the reason I’m interested in the industry again. I’m starting with the Ford Motor Company (NYSE:F) as it’s my favorite company in the industry. The company is sticking to its roots of producing affordable, high-quality ICE-powered cars while rolling out the biggest new platform of EVs on the market. The company has secured supplies for millions of future electric vehicles and its margins are expected to boost the company to a whole new level.
In other words, I think what we’re dealing with here is a new era for car manufacturers. Hence, Ford 2.0.
Now, let’s look into the details!
A New Era For Auto Companies (Less Supply)
The pandemic marked the starting point of a lot of new secular trends. One of these trends is a global push for everything climate-related.
This includes getting as many EVs on the road as possible. However, one of the biggest trends impacting automotive production was not the push for EVs, but supply chain problems that were dominated by hefty chip shortages. As automotive chips offer producers rather low margins, companies preferred customers in more “tech-oriented” industries.
While this caused a huge backlog on a producer level, it also changed something. It pushed up used and new car prices and it even caused producers to change their strategies.
One article that perfectly summarizes this new trend was written in Europe’s industrial heart, Germany, where one of the country’s largest newspapers wrote that buying cars will become a luxury for the middle-class.
What happened is that car manufacturers have hiked prices and even scrapped cheaper models (with lower margins).
According to WELT (translated):
BMW, for example, no longer offers the 320d Advantage, but only a more expensive basic version. In August, Fiat discontinued the lower-priced Icon variant of the 500e, making the entry-level model 3,000 euros more expensive. On average, the 30 most popular internal combustion vehicles in Germany cost €31,913, while the 15 best-selling electric cars averaged €42,786 in August.
The problem is that this is keeping customers away – at least in Europe. In the US, the situation is a bit different as demand remains strong. Moreover, Ford is seeing higher margins and it is catering to a wide range of customers, which is now a huge win for the company.
I made the graph below using public data, including consensus estimates and the company’s own comments (for 2026). Without looking at the background story, Ford has entered a new era of high profitability. Between the post-Great Financial Crisis consumer recovery of 2012 and the end of the horrible pandemic year of 2020, the company’s adjusted EBIT margins averaged 3.4% (3.7% excluding the pandemic). Margins rose in 2015 and 2016 when very low oil prices boosted its (high-margin) SUV business, after which slower economic growth and the pandemic that followed hurt margins.
Now, the company is in a period of elevated margins, with room to grow margins to 10.0% according to the company itself, which aims for a 10% adjusted EBIT margin by 2026 based on more than 2 million annual electric Fords leaving its plants.
Let’s dive into that as a result even remotely close to that margin goal makes the F ticker on the stock market a total steal.
Ford’s Impressive Transition
Going into next year, Ford will change its reporting segments. Ford will operate three related segments. Ford Blue, focuses on ICE (internal combustion engine), Ford Model E, covering its EV portfolio, and Ford Pro, which aims to deliver a comprehensive experience for commercial and government customers that includes both electric and ICE vehicles.
Moreover, Ford Blue and Ford Model E will support each other when it comes to shared technology development and pretty much everything except for the main source of energy under the hood.
The goal here isn’t just to let Ford Blue slowly die as demand for “cleaner” energy sources rises, but Ford is aiming to be more agile as it takes on competitors in both areas.
Ford Blue will sell “emotional” vehicles that people have come to love like the Bronco, the F-150, and other models that have made Ford the way it is. This includes vehicles like the Ford Maverick, a small SUV with a starting price close to $21,000 that comes as a hybrid. I not only think it’s a brilliant move to offer these products, but also a chance for Ford to exploit a part of the market that will almost certainly be neglected by some of its major peers.
Moreover, the Ford Blue segment is expected to be the source of funding for Ford Model E. After all, Ford isn’t a risky startup but a company with the infrastructure and product portfolio (including the obvious knowledge) to transition towards reliable EVs.
Hence, Ford Blue will benefit from new developments in Model E, while delivering the Funds for Ford to innovate. It’s a win-win for customers in both areas. As well as Ford’s shareholders.
This formula for success is called Ford+.
With that said, the company’s results are extremely promising. Its first-generation EVs are selling as fast as the company can produce them. In this case, we’re talking about the Mustang Mach-E, the F-150 Lightning, and the E-Transit. These products are expected to allow the company to penetrate what is a market in its early stages.
The company’s production rates are impressive. This summer, the company produced roughly 14,000 EVs globally (per month). At the end of next year, that number is expected to be 60,000.
This is expected to lay the foundation for 2 million units by late 2026. What’s interesting is that the anticipated growth rate in EVs through 2026 is more than twice what Ford expects for the global EV industry in total.
The big problem is that supplies are scarce and most of them are processed by China.
It’s fair to say that only half of the required supplies for global EV targets are available. That’s where Ford comes in. The company has secured enough supplies to produce its expected EV production rate of 600,000 units for 2023. Moreover, the company has secured 70% of the battery capacity needed to achieve its 2 million units goal by the end of 2026. Ford also has a deal with the world’s largest battery producer CATL on strategic cooperation for global battery supplies and raw material deals with companies outside of China.
Meanwhile, in Ford Blue, the company continues to roll out hybrid models of the F-150, Bronco, and Maverick while focusing on new models like the Mustang, F-150 Raptor R, and two new Bronco models.
This helped the company to boost new vehicle sales by 27% in August. While this is mainly caused by 2021 supply chain constraints, there is a lot of good news. As reported by CNBC:
F-Series was America’s best-selling truck, best-selling hybrid truck and best-selling electric truck with F-150 Lightning in August. Ford’s overall electric vehicle portfolio expanded four–fold in July, while conquesting from competitors at a rate over 60%,” Andrew Frick, Ford vice president of sales, distribution and trucks, said in a release.
Ford’s 2022 electric vehicle sales totaled more than 36,500 units through August. That included sales of about 5,900 vehicles in August, which was 23% lower than the prior month but up more than 300% from a year ago.
Related, it’s interesting that Ford is indeed one of the best performers on the stock market over the past 12 months. It is beating the market together with its EV peer Tesla (TSLA). The worst performer of the bunch below is Mercedes-Benz, which struggles tremendously with challenges in Europe and a weaker euro.
Adding to that, the company has completely taken over the commercial market – at least for EVs. In 2Q22, the company sold more than 3,000 E-Transit models, which gives it a 95% market share.
This will obviously change, but being first is a benefit. Especially because Ford is moving fast. It has affordable models in place and it’s winning in the early innings of the EV transition.
Moreover, Ford owns roughly 10% of the start-up EV company Rivian Automotive (RIVN).
Going back to higher margins, Ford is completely reshaping its legacy business, Ford Blue. The company will reduce unnecessary costs, redesign work, and strategically invest in its most successful products.
This brings me to the next part of this article.
Ford – Some Numbers
As I mentioned before, Ford is aggressively investing in a growth industry. However, investors do not need to buy a money-burning company to benefit from growth in the EV space. Ford isn’t just dominating the transition, it is making money while doing so. While annual CapEx is expected to exceed $8.3 billion by 2024, free cash flow (operating cash flow minus CapEx) is expected to reach $5.7 billion in 2024.
Not only that, but if the company can indeed reach to $5.7 billion in FCF in 2024, it would imply a 9.4% FCF yield using its current market cap of $61.0 billion.
This supports balance sheet health, more aggressive future investments (if needed), and the dividend, which was raised by 50% in July, bringing the current yield to 4.0%.
In other words, Ford is a semi-growth stock with a dividend yield in the “high-yield” category.
The bad news for employees is that the company is going lean as I just mentioned. EVs in general have fewer components. Add shorter production processes and more efficient plants, and we arrive at a scenario where Ford is able to cut labor costs.
Morgan Stanley’s Adam Jonas asked CEO Farly: “Does Ford have too many people?”
James Farley answered:
[…] Adam, we absolutely have too many people in certain places, no doubt about it. And we have skills that don’t work anymore. We — and we have jobs that need to change. And we have lots of new work statements that we’ve never had before.
We are literally virtually — we are reshaping our company, like every part of our company. And on our ICE business, we want to simplify it. We want to make sure the skills we have and the work statements we have are as lean as possible. We know our costs are not competitive at Ford. We are — that’s what I mean by we are not satisfied.
Moreover, and this is why Ford is different now:
This is a different kind of change where we’re reshaping the company, reshaping skills, investing in new technologies and simplifying investments in others, i.e., spending less.
In other words, the company is pretty much confirming what I expected. It’s reshaping the entire company as it rolls out models that fit its new strategy.
Ford is down 27% year-to-date. That’s 10 points below the S&P 500’s performance.
As good as the bull case sounds, investors aren’t eager to buy cyclical companies. Consumer sentiment has imploded, manufacturing orders are coming down, Europe is battling an unprecedented energy crisis while the Fed is eagerly hiking rates to combat inflation. In other words, even if the situation gets worse, monetary support is unlikely as long as inflation is elevated.
The good news is that Ford is still in a good spot. The company has more than 3 years’ worth of backlog – 3 years!!! – which allows the company to offset mid-term economic risks. While bad economic sentiment weakens its stock price, Ford as a business will be fine, even if new orders start to weaken substantially.
As a result, normalized EPS estimates see a gradual decline back to $1.94 by 2024 as new orders are set to weaken while Ford continues to work on its backlog. For short-term traders, that’s bad news. For long-term investors, I think it’s good news. At least given the circumstances. The same goes for me as an investor in railroads, as this means that automotive shipments are likely to remain favorable despite cyclical headwinds.
It also means that Ford remains favorably valued.
Using 2024 EPS, the company is trading at 7.8x earnings. I’m using 2024 numbers here as that’s where EPS is headed given the circumstances. If economic growth rebounds in 2023 with support from a pivoting Fed, which I believe will happen, I think we’re looking at much higher EPS in both 2023 and 2024.
With that said, on a long-term basis, I do not believe that Ford should trade below 10x earnings. Especially now what I like to call Ford 2.0, which will achieve higher margins and deliver accelerating shareholder distributions on a long-term basis.
Based on Ford’s story and numbers, I believe that a fair value is $20-21 per share, which implies a 33% upside. On a long-term basis, I expect much more upside. Especially with accelerating margins going into 2026. At that point, CapEx will likely come down a bit supported by an increasing backlog and healthy orders.
Moreover, by then, Ford’s production will be much leaner.
In other words, I believe that Ford will continue to outperform the market – unlike in the years between 2011 and 2020 when Ford was a huge disappointment for everyone except the ones collecting its (high) dividend.
Ford is truly impressive. The company may be old and a “boomer” stock, yet no automotive company in the world offers similar products. Ford is set up to benefit from its legacy ICE business, which includes hybrid technologies, affordable/popular vehicles, and technology from the new Ford Model E segment where the company outperforms almost all of its peers in the race for electric market share.
On top of that, the company has secured much-needed supplies for the years ahead, which will allow the company to become even more competitive from an input price perspective.
What it comes down to is that Ford has a huge business to leverage investments in new technologies. It has infrastructure and knowledge, and it can stomach high annual CapEx.
Not only that but even while ramping up investments, Ford is set to generate very high free cash flow to sustain and grow its 4% dividend yield.
I didn’t expect to write this a few years ago, but Ford has become a great mix of value and growth.
Even better, the price is attractive, allowing investors to buy well below the fair value of the company.
However, if you decide to buy F shares, please expect high volatility and no high capital gains until at least 2023. The market is nervous, economic growth is weak, and export markets like Europe are on the verge of “imploding” (yes, really) due to sky-high natural gas prices.
In other words, if you decide to buy Ford, make it a long-term investment. Start small, and add on dips.
Other than that, I think investors are in a good spot to benefit from what should become a very successful era for Ford 2.0.
(Dis)agree? Let me know in the comments!