Ford: Not So Fast
Summary
- Ford has surged on behalf of prospects of its electrification of its vehicle fleet.
- But as we saw with companies like Tesla, it will likely take years for them to see any profits from these vehicles and the room for error is slim.
- As I examine the company's valuation and prospects, I find some bearish signs for their short-term valuation even as I remain cautiously bullish on their long-term prospects.
Ford Motor Company (NYSE:F) has been taking in a lot of positive news lately after they released more details on their electrification process, in which they are converting current facilities to accommodate new electric vehicle manufacturing. The most notable catalyst is the all-electric F-150 truck, which is one of the most popular pickup trucks in the world.
Even though I am extremely bullish in the long run on behalf of this news, since the brand popularity and loyalty will almost certainly work in their favor, I think there are too many factors in this electrification process which investors are missing and that the recent rally may not be justified. Yet.
Electrification Process Isn't Simple
Remember when Tesla (TSLA) was seen by investors as a hype stock for years as they weren't showing a single dime in profits and spending massive amounts of money on their own battery operations, automating what's left of the assembly manufacturing process and doing crazy things like installing thousands of charging stations around the country? So do I.
What I'm saying here is that all these things take time. There are several things Ford will have to do, and spend heavily on without seeing any short term rewards, before they'll be able to produce the amount of vehicles analysts are currently projecting and even more so - make a dime in profit.
1. Manufacturing overhaul: Sure, there are similarities in their current assembly lines to the ones they need for the electric versions of their vehicles, but not all. They'll need to, like Tesla did, convert existing manufacturing sites and procedures to make sure they're efficiently producing vehicles and this takes a large investment of both resources and time. I don't think it'll be as quick as some people may think.
2. Battery production: Ford has formed a joint venture with SK Innovation, a leading battery manufacturing company in South Korea, and it is set to produce batteries for the company's newest electric vehicle models. Beyond that joint venture, the company is aiming at producing most of their own batteries and thus save, in the long run, on costs associated with the energy segment of electric vehicles and any other accompanying products it may offer in the future. This, similar to Tesla in the past, takes a lot of time and money to reach the large scale they will need to mass produce as demand inevitably soars.
3. Charging stations: Although with Tesla opening up their charging stations to all electric vehicle customers, the emergence of companies like Blink Charging (BLNK) and the announced investment of thousands of new charging stations in the Biden Administration's new $1 trillion infrastructure plan, this won't be as big a hurdle as Tesla faced early on but it still remains a tough long term struggle to get costs down by providing charging station offerings across the US and the world.
4. Profit margin: Overall, it's unclear exactly what profit margin, if any, the new electric vehicle offerings from Ford will have and even if it does, how many vehicle sales it would take to pay back for the billions in investments the company is making to switch over existing plants, research & development, new hiring and other SG&A expenses and marketing costs. A company like Tesla already went through all of those hurdles and we saw how long it took.
5. Marketing: Although the company doesn't suffer from any lack of publicity, brand recognition or ability to internationally market their new offerings, they do lack the name and prestige element that Tesla had, since they are, at the end of the day, providing an electric version of the same car they've been making for decades. It is also noteworthy that Ford and other automobile companies spend a fortune on show rooms and dealership agreements, whereas Tesla does not.
So what does this all mean?
I don't mean to bring all this up to say the company isn't going to be a major player in the electric vehicle market or calling them aggressively overvalued. As I point out later in the article, I actually remain highly bullish on the company's long term prospects both in their electrification goals and in their non-EV market segments. What I am saying is that recent share price and valuation surges the company has experience seem to be on behalf of comparisons to established EV companies like Tesla when it comes to sales abilities and more importantly - profitability.
These comparisons are, I believe, unwarranted at this time. There's simply no way that Ford can make the same profit margins as Tesla is making right now. Even more than that, I believe they'll be burning through quite a bit of cash over the next few years as they ramp up production and utilize their world renown efficiency standards to maximize profits.
So, does that mean that the company is currently overvalued or are they simply baking in sales and income growth which belongs years in the future?
Baking in 2025 profits in 2021?
The latter is true, at least in my humble opinion. I do believe that although the relatively low price to earnings multiple, that there isn't really a justification for the post-EV announcement rally and that any of that is trying to bake in profits and income which will only be made years from now right now and in a volatile industry like the EV one, that is premature.
Ford already has some valuation issues relative to peers where forwards price to earnings multiple is slightly higher than peers like General Motors (GM) and Honda Motor Co. (HMC) even as, arguably, those companies are a little ahead of Ford when it comes to full electric vehicle manufacturing. Even more so, Ford's gross margin and profit margin is lower than General Motors and Honda and the introduction of electric vehicles will only grow that deficit moving forward.
Looking at current growth rates, I believe that current analyst projections are fairly accurate, as they begin to bake in some growth from EV sales only in 2025. For sales, they expect the company's growth rate to steadily decline into negative territory by 2024, followed by a slight increase as EV production begins to compensate for lower overall vehicle sales, as previous trends show.
When it comes to profitability, and the company's valuation, analysts are expecting the same and for profitability from the EV sales to come later. For 2022, post the COVID-19 pandemic comparison year, the company is expected to report a 16% growth rate in EPS to $1.87, followed by a 9% growth rate in 2023 EPS to $2.05, a 1% growth rate in 2024 EPS to $2.07 and a 0.8% decline in 2025 EPS to $2.05. I believe that the company will be showing solid profits from their electric vehicle base, which will overcome the loss of certain non-electric vehicle sales and other financial services losses as loans and higher interest rates soften demand.
So, is pricing in profits which are expected to overcome some of the declining overall business now worth an investment look for the longer run? Probably yes. I do think that Ford's business is strong and that they will have the upper hand when it comes to brand recognition and superior supply-side capabilities. Even so, I don't believe that the recent rally is justified and I would caution investors that if there is any indicative slowdown or setback in the electrification implementation plan or unforeseen competitive pressures in the coming years that the company's valuation can take a hit.
I remain neutral to slightly bearish on the company's short-term prospects but cautiously bullish on their long-term prospects.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of F, SHORT TSLA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Opinion, not investment advice.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (138)
He said it was a great first try.
And he also doesn't understand why F designed the Mach-E the way they did. But I do. And if he knew what I know, he might just change his mind.
Tesla's toast, and that's why you are here.
I feel your fear.BTW, how's it going now that Elon admits the Cybertruck might bomb and that the batteries he was developing and the FSD might not work??
Did you really think that Rivian would be able to produce all those vehicles?
I may have misunderstood your point.
Hedge funds are institutions.
I suspected that 2022 Q1 and Q2 latest. Late this year, watch Dec. sales.The problem with trying to evaluate what and when F will pay is why there is a forward and a historic P/E. Neither is not a good valuation of the stock (unless it gets crazy). It relates nothing about investor's sentiment. Profits and especially earnings are limited because they are so fungible. One should look at cash, cash burn, margins, expenses, CAPEX and strategic plans on expenses and structuring. F to cut 14K jobs, that is worth at least 1B to the bottom line.
That said forward P/E done well, that's where the potential for accuracy rests. It's just the projections, be hard...
It's about the total involved the 5 year plan. It stated with about 8,500 and last count I'm pretty sure was over 14K. But that's years worth of job cuts, so "old" and some not. It adds up to over $1B per year.
What you don't understand is that the introduction of these new vehicles is NOT at maximum production. It is just the opposite. They have targeted enough supply, to keep the prices high, make a great profit and do so while waiting for broad general acceptance and finally manufacturing at scale with new technology.
