I Expect Hybrid Trucks And Recurring Services Will Drive Future Success

Key Takeaways

• Hybrid truck focus and platform flexibility boost revenue, pricing power, and provide affordable options enhancing future volume potential.
  
• Recurring revenue streams and cost reduction efforts improve earnings, significantly impacting net margins positively.
  
• Ford faces challenges from tariffs, EV market competition, market reliance, high EV costs, and macroeconomic uncertainties impacting revenue and profitability.

Catalysts

Develops, delivers, and services Ford trucks, sport utility vehicles, commercial vans and cars, and Lincoln luxury vehicles worldwide.

• Ford's focus on hybrid trucks, a key growth area, allows them to capture the lion's share of revenue and command pricing power with unique features, likely positively impacting revenue and net margins.
  
• Ford is building recurring revenue streams through their software and physical services, like Pro software subscriptions and telematics, which could significantly improve earnings and net margins.
  
• The electrification strategy that includes developing flexible platforms for multiple powertrains, including hybrids and EREVs, allows Ford to offer affordable options, potentially boosting future volume and revenue.
  
• Cost reduction efforts, such as improved material cost efficiencies and warranty expense reduction, are expected to generate a multibillion-dollar upside, significantly impacting net margins and earnings.
  
• Launching new high-margin products like the new F-Series, Super Duty, and expanding Ford Pro's high-margin services can drive top-line growth and improve net margins.

Ford Motor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ford Motor's revenue will decrease by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.2% today to 3.9% in 3 years time.
• Analysts expect earnings to reach $6.8 billion (and earnings per share of $1.67) by about March 2028, up from $5.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $10.5 billion in earnings, and the most bearish expecting $3.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2028 earnings, up from 6.9x today. This future PE is lower than the current PE for the GB Auto industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Ford Motor Future Earnings Per Share Growth

Risks

• The conference highlighted potential impacts from evolving trade and tariff policies, particularly the risk of a 25% tariff from Canada and Mexico, which could substantially affect profits and U.S. jobs, leading to higher prices for customers and impacting revenue adversely.
  
• Ford acknowledged ongoing pricing pressure in the EV market due to increased competition and the introduction of numerous new models, which might negatively impact Ford's pricing power and revenue growth in this segment.
  
• The company's reliance on a few key markets, such as the North American truck market, could be a vulnerability, especially if unfavorable pricing pressures and adverse exchange rates in markets like Argentina, Brazil, and Turkey persist, potentially impacting revenue and profitability.
  
• There is uncertainty surrounding the economic viability of large EVs for retail customers due to their high costs and consumer resistance to paying more for these vehicles, which could impact Ford’s future net margins and earnings in the EV segment.
  
• Sherry House noted the necessity of maintaining high cash reserves due to the fluid macro environment and evolving regulations, which could limit Ford's ability to reinvest in other revenue-generating or cost-saving initiatives, potentially impacting long-term revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $10.692 for Ford Motor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $17.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $172.1 billion, earnings will come to $6.8 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 11.4%.
• Given the current share price of $10.29, the analyst price target of $10.69 is 3.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.