- The auto manufacturing business is a particularly tough one with high barriers to entry, high capital intensity, and fickle consumers.
- A difficult industry has become even more complicated by a massive shift to Battery Electric Vehicle. Legacy Auto has varying strategies.
- Ford has consistently made wise bets that show CEO Jim Farley is a visionary and understands how to stay relevant in future mobility.
- Of all legacy autos, Ford's product portfolio and balance sheet give it the most realistic prospects of maintaining solvency as it reaches EV goals.
- Ford's deep connection with its customer base and shrewdness in product and brand is complemented by a deep sales infrastructure.
It's easy to look at the landscape of the EV market as a monolith. But we plan to be surgical about where we play and how we win with the right products, the right cost structure, and the right price points. - Jim Farley
The auto business is a particularly grueling one. For me, at least, the auto industry has never been boring to cover. It is one of the highest stakes and most deeply competitive industries in existence, and of course, its birth coincided with the birth of modern industrialism. It is also an industry where management really matters, and it has had some of the most excellent managers in American corporate lore.
The industry is also at a technological crossroads and the convergence of multiple generational technological trends. The stakes are high, and in a business sense, life and death. Ford (NYSE:F) and Tesla (TSLA), for example, are the only two major American automakers to have never gone bankrupt.
There are ancillary ways to play the EV revolution. Too often, the investment choice is framed adversarially between Tesla and Ford. But regarding OEMs, I would be most inclined to own both Ford and Tesla, especially from a thematic investing perspective. Increasingly, they are in a class of their own.
Things can change pretty dramatically in the business of cars, even over only a decade or so. Today's loser is tomorrow's visionary. Take Lee Iacocca, who was ousted from Ford in 1978, a casualty of its notoriously tricky succession politics, only to later rise as CEO of Chrysler and introduce the blockbuster minivan product.
At a presidential debate in 2012, barely a decade ago, GOP candidate Mitt Romney called out Tesla as an example of the government picking losers since Tesla took advantage of some assistance from Uncle Sam early on. He even compared it to failed solar firm Solyndra, implying the prolific firm to be another left-wing favored, green energy boondoggle. Times have certainly changed.
Own the Tortoise... And the Hare
A decade later, that statement reminds us to be wary of applying consensus thinking to the auto industry. And consensus thinking today is that Tesla is king and has its boot on Detroit's neck. That may have been the case, but the dynamic is changing.
There's a lot of evidence to support Tesla's dominance. Still, there's also a lot of evidence to support its dominance could be waning-the small, aging product line-up cramps flexibility, too, as Mr. Farley pointed out recently. Ford also has the luxury of funding expansion with its highly profitable ICE models. A slow bleed might have started for Tesla, and GM's decline from top dog in the auto world shows that such a distinction rarely lasts.
Of course, one of the most impactful events in American commerce of the 20th century was Detroit blowing a seemingly insurmountable lead over Japanese rivals. The hubris of Detroit is a potent commercial lesson and shows that whoever is the top dog in the auto world may have their days numbered. But let's also remember it's a much different market.
And let's also remember that Jim Farley was originally a Toyota man, well-schooled in lean-six sigma, and is as comfortable discussing manufacturing as he is behind the wheel. And while Farley's story seems heartwarming, I think we'll eventually look back on it as more analogous to Atila the Hun being raised as a Roman hostage than a corporate fluff story. Farley's out for blood, don't let the fuzzy exterior fool you. He's got the knowledge and experience to get it. And he wants it from Tesla.
It's unlikely that the preferences of Chinese auto consumers for karaoke microphones in the car will fully transfer to US customers buying F-150s. But Ford knows its customers and is increasingly finding ways to compete in cutting-edge areas successfully. It's offering a competing vision that seems relatively commercially viable to those throwing billions at Level 5 Autonomy with no end in sight.
The company has a compelling vision that seems more and more pragmatic in the face of some of Silicon Valley and Tesla's setbacks in AV, for example. Ford has jumped at the tactical opportunity. It has objectively trounced Tesla in currently available self-driving technology as well, from multiple vantage points.
So, in about a decade, Tesla went from being an unproven pipe dream of a company to the dominant player in BEVs. I think it's safe to say, at this point, that Tesla's competitive position will be weaker in a decade, and Ford's will be stronger. I know Tesla sold over eight times as many EVs as Ford did last year. But this is precisely the point, Ford is the challenger now, and Tesla is defending.
As companies mature, they require a different set of skills to manage than earlier in their life. Let's say Mr. Musk is giving some folks doubt whether he has the discretion and humility necessary. Of course, he could prove his naysayers wrong again, but I'll have to wait to re-evaluate when there are some new models out.
But given the unnecessary forays of Tesla's eccentric CEO, I think if you're investing in the EV space in a thematic way, it makes sense to diversify your Tesla position with a little bit of Ford. Mr. Musk has even complimented the firm's EV strategy as "smart."
The companies are increasingly competing directly against each other, but Tesla also has room to grow whether Ford is successful in US markets or not. Plainly, I think they are the two most competent companies in Electric Vehicles, and owning them both on this logic makes sense enough.
Tesla has not released a new passenger vehicle in about three years now; this is long for the auto industry. Remember that Farley has also snapped up some key Tesla talent. In any event, as a former Barclays auto analyst said, "It can't hurt [Ford] to be seen in the same category as the market leader."
This changing perception is in the early phases rather than the later ones. That means opportunity for investors. So, I think there's a lot of time for potential shareholders to start building a position and using price weakness to add to their position. Ford's strategy will play out over a decade. You have time to build a position and let the dividends add to your margin of safety. I'm a big fan of Ford's direct stock purchase program, where you have the option to reinvest dividends.
If you're investing in the EV trend, Ford compliments a lot of Tesla's weaknesses as an investment. It has steady leadership, a fortress balance sheet, and a cozy relationship with Uncle Sam. These are all things lacking at the current market leader, impressive and as ahead-of-the-curve as it is in so many other ways.
Did you know, though, that Ford has more cash than Tesla and Meta?
This isn't a small accomplishment for a company whose market cap is minuscule compared to Apple and Tesla. This is a testament to competent management and shows that Ford has what is needed for the massively difficult transition to EVs, otherwise known as "bankruptcy dodgeball," given the considerable challenges and sleight of hand needed for success.
Hubris Can Be Fatal in the "Game of Chromes"
Whenever you find yourself on the side of the majority, it is time to reform, pause or reflect. - Mark Twain
I think it is safe to say that most people, and justifiably, would have bet that Napoleon Bonaparte was on his way to assured victory when he crossed the Niemen River to invade the Russian Empire in 1812 with one of the largest armies ever assembled and resting on impeccable laurels of stunning victory after stunning victory. Of course, as we now know, it would have paid to have a hedge. Over 90% of the men who crossed the river never made it home.
Wellington, at the time, was just a negligible British commander in the lackluster and grimy Spanish campaign. But he was steady. And as the Battle of Waterloo unfolded, it was clear that he was able to take advantage of Emperor Bonaparte's mistakes, as infrequent as they were. This dynamic serves as an appropriate analog for Musk and Farley, I think.
Remember, too, Ford is competing for your interest as an investor and pays a respectable dividend. Musk's regard for shareholders, while his delivery has been impeccable, is likely less respectful and accommodating. If Ford continues gaining valuation, and Tesla stays put or continues losing it, it's not inconceivable that a bridging of the considerable market-cap gulf could begin in earnest. Of course, parity is likely a long way off if it ever does occur.
You can see that in terms of net income, Ford is the underdog. You'll also see that its net income briefly surpassed that of every automaker, including Tesla, not long ago. The company has some serious potential under the hood, but it takes a while to turn the one-hundred-and-twenty-year-old ocean liner of Ford around.
Nonetheless, I see ample evidence to indicate that Mr. Farley, with a cool and steady hand, is building Ford into a company that will be dominant in the future of mobility. It will, at the very least, have a major seat at the table, and auto manufacturing has never been winner-take-all.
GM got closest to this dream in the early 1960s. Still, the lower relative barriers to entry in electric vehicles mean this dynamic likely won't be making a comeback. That reality likely plays out largely at Tesla's expense, not Ford's.
Tesla has obviously enjoyed a major valuation lead in recent years compared to its rivals in Detroit; however, in the last year, with aggressive Fed action, that began to narrow. Another thing has happened in the last year or so, Ford's valuation has started to break away from its old-guard auto peers.
While Ford just had a bad year and isn't immensely profitable at the moment, that is slated to change. Also, take Ford's current troubles in the context that Uber, Lyft, and DiDi have never turned a profit. There's an opening for old auto to chime in on and help define the future of mobility, and Ford is the one I'd bet on to be most successful of that storied cadre.
If you think the Fed is going to cut rates before their own projections, it must rest on an assumption that there will be some adverse event that forces the Fed's hand. As I wrote after the last FOMC meeting, I think the bond market is offsides, not Powell. So, for the next few months, that will put disproportionate pressure on Tesla, given its considerably higher multiple compared to Ford. Of course, a major recession could put considerable pressure on both stocks.
Ford is Doing Better in the "Game of Chromes" Than You Likely Think
Ford is well over a century old, but it can increasingly be called one of the leaders in the multiple technological revolutions shaking the foundations of mobility and the auto manufacturing industry. I also think that the company's CEO, Jim Farley, is quite a visionary leader with the right experience to take this American industrial stalwart into the future. He's overhauling the structure and strategy of Ford to better position the firm in its quest to dethrone Tesla in domestic EV sales.
Elon Musk is certainly a visionary leader who has redefined the auto industry, and others, in many ways. Does he still have the lead in many ways? He certainly does, and this bullish call on Ford is not meant to distract from Tesla's success or potential. It's not a challenger anymore, though, and Mr. Musk has proven himself at least an annoyance to shareholders recently.
Ford can be as old and siloed as Tesla can be dazzling and new, but this is 2023, not 2013. The veneer of big tech has worn off, and their externalities and downsides, like the extreme centralization of power in the hands of a CEO, have proven that shareholders have a legitimate reason for concern. Furthermore, a major reason for Tesla's superior valuation is its superiority in FCF. However, this advantage over Ford has been narrowing over the past quarters.
Furthermore, there have been setbacks in the autonomous driving plans of many of Silicon Valley's best and brightest, very notably for Tesla. Generally, the technology for full autonomy (level 5) is much further away than initially imagined by some optimists. I think this generally favors old-guard auto, and I think Ford is currently the best of old-guard auto.
A Tale of Two Chief Executives
Tesla is still firmly ahead of Ford, but even Mr. Musk admits he finds Mr. Farley's EV plan compelling. Instead of viewing the two stocks in an adversarial light, I think it makes sense to own them both. If you want to invest in EVs, particularly in the domestic market, it makes sense to start with the two major EV sellers that haven't gone bankrupt and that are leading sales. I'll follow up soon with some of my favorite international stocks in the space as well.
However, Tesla is not invincible, and its recent price action has shown that less traditional management approaches can have consequences for shareholders. While there was certainly some normal pressure on a stock like Tesla from the higher rates we've been subject to, any large shareholder who isn't a fanatic will tell you that Mr. Musk's antics caused some heartburn and continue to. Mr. Farley, on the other hand, is no drama and has a burning desire to prove he's every bit as much of a visionary as Mr. Musk.
Tesla has a limited line-up that revolves around certain trends that consumers might find falling out of fashion. There are a few different emerging visions for the future of mobility, and Tesla's conquer-everything and monetize-everything-in-the-car approach is certainly bold.
Still, it may be ill-fated in certain markets, namely here in America. Ford's relative restraint is an increasingly attractive alternative. For instance, many auto industry pundits think we've reached "peak screen," a trend decidedly not in Tesla's favor. Anyone who tells you they are certain who will win out between the two Titans in the future is lying or overly confident, so diversification makes sense.
Ford is taking a different approach that is more centered on software that is related to monetizing data, not necessarily selling content or monopolizing the interior. For instance, in the area of safety, Ford is emerging as a software leader. At the same time, Tesla also has great data on its vehicles; the insights Ford receives with its vast fleet are more transferrable to other manufacturers. And thus more valuable.
Valuation and Dividend
Ford's valuation is very compelling when using a discounted cash flow model. Given the company's increasing prospects to better monetize EVs over time, the firm seems undervalued at current prices. Of course, there's also potential for significant multiple expansion. There is also one area where I could even see some potential upside to current assumptions.
Given the push to shore up domestic manufacturing and solidify supply chains, one positive catalyst could be a diminished tax obligation for Ford or other goodies from Uncle Sam in the coming years. Ford knows how to make subsidies accretive to shareholders.
A DCF model is always just one input, and you shouldn't consider the implied upside from the model as a price target. For instance, if you use a dividend discount model, then Ford appears overvalued, given its inconsistency in dividends caused by the financial crisis and then COVID-19.
Still, one of the compelling arguments for building a Ford position now is that things are likely to keep improving as the company continues on Farley's strategic path. The yield is undeniably good and ahead of its peers. But it's not just the yield; it is the stock's appreciation potential that makes compounding more potentially effective. You can see below that net profit is expected to quadruple between 2023 and 2027.
Seeking Alpha has a great Quant Factor Grades product that I always look at when evaluating a stock. Ford has seen a notable improvement in valuation, momentum, and revisions over the past few months.
As for dividend safety, under the leadership of Farley, the firm has taken great strides to build multiple resilient revenue streams that lessen the cyclical features of the business relative to many peers. This is good news for the safety of the dividend going forward, even though many investors have felt let down in the past.
The dividend payout ratio is around 25%, which is good. But you don't own Ford for the dividend alone; it's for the dividend and the price appreciation potential. I think there's a good mix here that, again, provides a good margin of safety for those looking for steady exposure to the EV revolution.
Risks and Where I Could Be Wrong
Ford has a sprawling manufacturing footprint that is spread across the globe. Though it has taken efforts to streamline and prioritize, it is still exposed to geopolitical risks. However, the geopolitical effects on the auto industry should be relatively less than, say, semiconductors.
Ford's bad year in 2022 is a great way to look at the firm's risks. The auto industry is always full of them. Recalls, reputational issues, economic weakness, and increasingly stretched consumers could all plague Ford in the quarters in years ahead at any time. One of the benefits of being a 120-year-old company, though, is that organizationally the firm knows how to respond to all these risks.
One Seeking Alpha contributor, in particular, stated the bear case for Ford with development to rising risks of an economic slowdown very well. I'd recommend this article to explore the risks more fully. The supply chain risk, while mitigating in some areas, is ever-present in a world with deteriorating geopolitical cooperation.
Musk has hung up his spurs at Twitter, and maybe with a renewed focus, he will breathe new life into his revolutionary company and solidify his lead. The cyber truck could eat into F-150 sales, Ford's cash cow. However, I think Ford's strategy has repeatedly been proven to be not only sound but increasingly competitive with Tesla's over a longer arc of time. The price war, of course, could also end up hurting both companies.
The increasing competition between Tesla and Ford can get people worked up. We are lucky, though, as investors, that we don't have to choose a team and can profit no matter who wins. I think the public perception regarding Tesla's dominance is starting to diverge from several strategic realities in one of the 21st century's most important technological trends.
The auto industry has never been a winner-take-all business, and there's a lot of room for different ways to be successful. There are an unprecedented amount new entrants with fancy designs and flashy models, but there are very companies who have produced hundreds of thousands or millions of battery electric vehicles.
One way to have a solid and risk-averse strategy when investing thematically in major trends is to expose yourself to players who are actually making money from sales of whatever the said trend is, not just filling their earnings transcripts with hot words and eye-catching presentations.
Tesla's lead in Electric Vehicles appears increasingly at risk from a number of competitors, and none of them is stronger than Ford. That's why I recommend owning both for investors looking for exposure to the EV revolution.
This article was written by
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