Rising Labor Costs, Tight Competition And Stricter Credit Conditions Put Pressure On EBIT

The Latest on Ford

Earnings Call Highlights

• Ford Pro Segment (Commercial): 
  • Q3 2024 revenue of $15.66B, up 13.2% compared to $13.83B in Q3 2023.
  • EBIT comes in at 1.81B, at a margin of 11.6%. A slight drop in EBIT margin from 12% a year ago due to reduced rental business and plant shutdowns, demand remains robust for key products like Super Duty and Transit.
• Ford Model e Segment (EVs): 
  • Q3 2024 revenue of $1.25B, down 37.2% compared to $2.0B in Q3 2023.
  • The Model e segment reported an EBIT loss of $1.2 billion. While Ford achieved $500 million in year-over-year cost improvements, these were offset by industry pricing pressures and an 11% decline in global wholesales.
• Ford Blue Segment (ICE vehicles): 
  • Q3 2024 revenue of $26.2B, up 3% compared to $25.6B in Q3 2023.
  • Revenue increased by 3%, despite a 2% decline in wholesales due to the discontinuation of low-margin ICE passenger vehicles.
  •  EBIT stood at $1.6 billion with a margin of 6.2%, both down year-over-year due to adverse exchange rates and higher manufacturing costs.
• Ford Credit: 
  • Generated earnings before taxes of $544 million, up $186 million year-over-year, driven by improved financing margins and higher receivables. 

Ford’s EV Strategy Requires some work

• Ford is rejigging its EV plans in North America after a bump start to their electrification push. Ultimately, Ford decided to reduce its capital expenditure on pure electric vehicles from 40% to 30%, reallocating resources towards hybrid models and cost-effective EV solutions.
• Ford has scrapped plans for its next lineup of all-electric SUVs, replacing them with hybrid models. While it’s great to be agile enough to make these decisions to improve profitability, there are still some negative impacts and the decision resulted in a write-down of manufacturing equipment worth at least $400 million, with total costs potentially exceeding $1.5 billion.
• The production of the next-generation “T3” electric pickup truck - the successor to the F150 Lighting has been delayed by about 18 months, now slated for the second half of 2027. While neither good nor bad, it’s perhaps a sign that Ford feels the need to develop the platform further before bringing it to the market to ensure more commercial success.
• Ford’s shift in strategy seems to be in response to them understanding that they’ve missed the beat with their EV rollouts. Their initial push failed to connect with consumers and the new strategy acknowledges that customers are increasingly price-conscious and range-anxious, hence why focussing hybrid offerings is their primary concern. So far so good as well, with hybrid sales increasing by 30% in the quarter. Ford plans to carry this focus forward through to 2030, hoping to deliver hybrid options across its entire North American lineup by then.

Things of Note

• Ford’s next EV entry will be an electric commercial van in 2026, capitalizing on the success of its “Pro” commercial vehicle and fleet business.
• A specialized team in California is developing a new small EV platform, with a midsize electric pickup expected to launch in 2027.
• Ford plans to allocate resources towards areas where it has a competitive advantage, focusing on segments with higher adoption rates for EVs and hybrids.

My Latest Thoughts

Assumed challenges in EV penetration seem to be playing out

• The adjustments in Ford’s EV strategy seem to be in a direct response to factors that I assumed would bog down their rollout. Ford’s acknowledgment that the EV market isn’t growing as rapidly as anticipated aligns with my original assumption that consumers are hesitant to adopt EVs due to higher costs, range anxiety, and underdeveloped infrastructure. The shift towards hybrids indicates that pure EV adoption is lagging, which seems to confirm my thought that EV sales growth will be limited in the near term.The real question now is whether this is the right move long-term. Ford has bitten the bullet to shift away from a pure EV play, but this could come with issues down the road. While I think today’s consumers are more comfortable with hybrid vehicles, this could quickly change if concerns about range, cost and infrastructure are addressed. The end result here could be Ford massively behind other competitors once the tides shift towards EVs, as they will have lost ground on competitors who solely focussed on delivering an EV that met the needs of consumers.

Rising competition is still on Ford’s mind

• Ford’s shows continued concern about rising competition from Chinese automakers like BYD. While the company touted consumer concerns as part of the reason they shifted to a hybrid focus, it’s hard to assume that it wasn’t also partially a response to competitive pressures, especially from manufacturers who can produce cost-effective vehicles.Ford CEO James Farley indirectly hinted at Ford conceding defeat to BYD with respect to battery hardware, stating, “we think companies like BYD have an incredible advantage on affordability of batteries. So we have to make that up where our opportunity is on the EV component side, inverters, gearboxes, motors, et cetera.”While this isn’t a crazy new revelation, it seems to point to the fact that Ford is running from a fight a little bit and seems to confirm my initial thoughts.

The impacts of rising labour costs are being felt

• While the UAW strikes have all but subsided, the increased focus on cost reductions and efficiency improvements suggests that Ford is feeling the pressure of rising operational costs. The earnings call acknowledged higher manufacturing costs and the need for aggressive cost-cutting measures, which seem to point to the fact that increased labour costs have had an overall impact on costs, one of the key assumptions that I had made with respect to labour costs and their impact on EBIT margins. It’ll be interesting to see how Ford continues on its cost-cutting warpath. Affordability is front-of-mind for a lot of consumers right now, so if they can cut costs efficiently, I can start to see a bit of demand pick up slightly in the near term if they can deliver affordable hybrids to consumers.

Adjustments in Assumptions

Given these developments, I am inclined to adjust my assumptions:

• Firstly, I have rebased my narrative using the last 12 months of figures. That means my valuation uses $182.74B as a current revenue figure and $3.53B as a current earnings figure.
• With Ford scaling back its pure EV ambitions and focusing more on hybrids, I anticipate that the sales volumes may not decline as sharply as initially thought. However, the pivot indicates a strategic retreat rather than a position of strength, so I remain cautious about significant growth in automotive revenues. Over the next 5 years to 2029, I will assume a 3.5% revenue growth for Ford, accounting for an uptick in the near-term but a plateauing closer to the 5-year mark. This results in $217B in revenue in 2029.
• The aggressive cost-cutting measures and focus on capital efficiencies might help mitigate some margin pressures. Yet, the cancellation and delay of key EV projects could result in sunk costs and write-downs, negatively impacting overall profitability. Ford is currently operating at a 1.93% net profit margin in the midst of their current strategic shifts, so I could reason with this improving slightly to 3% by 2029, which assumes that they’re still investing a significant amount in developing battery technology. Given my revenue projections, this 3% net profit margin would result in $6.5B in earnings in 2029.
• I’m going to assume that Ford’s PE will recede slightly. Ford is currently trading at around a 12x PE margin, but owing to the fact that I see them slipping behind competitors with respect to their EV projects that will become important after 2029, I can see them trading at a multiple closer to 10x.
• The changes to my valuation results in a new fair value of $9.70