Shifting Gears To High-Margin, High-Growth Futures In The EV Revolution

Key Takeaways

• Ford's shift towards a high-margin, high-growth strategy with a focus on digital and EV technologies promises potential for increased earnings and market share.
  
• Emphasizing operational efficiency through flexible manufacturing and a focus on quality improvement aims to reduce costs and improve profitability.
  
• Ford faces potential challenges from pricing sustainability, older model warranty issues, electrification strategy risks, cost competitiveness in the EV market, and regulatory uncertainties.

Catalysts

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

• Ford's dedication to transforming into a high-margin, high-growth company, especially by focusing on the Ford Pro business, signifies an intention to break away from the traditional low-margin and capital-intensive model of legacy automakers. This strategic shift is expected to enhance revenue and expand net margins significantly.
  
• The implementation of software-defined vehicles and advancements in digital experiences underline Ford's move towards high operating leverage. This translates into potential for increased earnings as Ford harnesses software and digital services for revenue growth, with higher margins than traditional vehicle sales.
  
• Expansion of Ford's EV and hybrid offerings, including the strategic decision to introduce more affordable and smaller electric vehicles, suggests an aggressive approach to capturing a larger market share in the EV segment. This forward-looking strategy aims not only at increasing revenue but also at improving the cost-efficiency of EV production to enhance overall company profitability.
  
• Ford's emphasis on flexible manufacturing and the development of a multi-energy platform strategy reflect an operational efficiency drive. This approach is likely to reduce manufacturing costs, improve the product mix, and contribute positively to both revenue growth and margins by offering customer-centric powertrain choices.
  
• The company's investment in the improvement of initial quality and the subsequent reduction in warranty costs present a clear path to improving net margins. By addressing quality issues proactively, Ford is poised to reduce long-term operational costs and enhance customer satisfaction, contributing to sustained financial improvement.
  

Assumptions

• Analysts are assuming Ford Motor's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $8.1 billion (and earnings per share of $2.03) by about August 2027, up from $3.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $9.8 billion in earnings, and the most bearish expecting $6.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.9x on those 2027 earnings, down from 10.1x today. This future PE is lower than the current PE for the GB Auto industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 0.67% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Risks

• Concerns around the sustainability of high pricing within the Ford Pro segment, as demand/supply dynamics shift, could potentially put pressure on margins.
  
• The potential impact of warranty issues arising from older model vehicles, which might continue to drive unexpected costs and affect profitability and cash flow.
  
• The risk associated with the significant investments in new technologies and electrification strategies. If market conditions change or the adoption rates vary significantly from Ford's forecasts, there could be a negative impact on revenue and margins.
  
• Ford's strategy hinges on its ability to compete on cost with Chinese and other leading electric vehicle manufacturers, particularly in the small, affordable EV segment. Any failure to achieve cost parity could affect competitiveness and profitability.
  
• Regulatory and political uncertainty, especially with upcoming elections, could influence the demand for electric vehicles and Ford's ability to meet environmental and sales targets, thereby impacting long-term strategy and earnings potential.

Valuation

• The analysts have a consensus price target of $13.63 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 $20.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $186.8 billion, earnings will come to $8.1 billion, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $9.71, the analyst's price target of $13.63 is 28.8% higher.
  
• 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.