In a recent fireside chat, Ford's (F 0.66%) CEO Jim Farley said that seeing Tesla's (TSLA -1.92%) second-quarter results last year was an "epiphany" for him. He realized that electric vehicles can make more money for Ford than its internal combustion engine (ICE) offerings.
Although Ford is more focused on the commercial vehicles, SUVs, and crossovers -- products that Tesla doesn't offer yet -- the century-old automaker is willing to learn all that can help it stay relevant.
Ford targets higher margins
In Q2 2021, when Farley experienced an epiphany, Tesla reported a net profit margin of 9.6%. By comparison, Ford's margin was 2.1% for the quarter. What's more, Tesla's margins continued to grow after that.
Ford's margins in Q4 and Q1 2022 in the chart below are adjusted for the impacts of its Rivian Automotive investment.
Data source: Ford and Tesla. Chart by author.
Ford believes that margins for electric vehicles (EVs) should be higher than those for ICEs. That's a key reason why Ford is pushing to increase its EV sales. The company expects that EVs will account for half of Ford's global sales by 2030.
Ford targets adjusted EBIT (earnings before interest and tax) margin of 10% by 2026. In the last five quarters, the company's EBIT margins averaged about 7%.
Ford is primarily looking at three areas to boost its margins.
1. Saving on dealership costs
The first area for improvement, according to Farley, is distribution costs. He noted that Ford's distribution model is "about $2,000 per unit, more expensive than Tesla." Farley further noted that a third of this could be attributed to inventory lying idle at its various dealers.
Over time, Ford intends to deliver vehicles directly to customers and get rid of idle inventory at its dealerships. However, it plans to use its dealership network to provide better after-sales experience to its customers. It believes that having a physical presence can be an advantage over start-ups, which cannot invest in developing such a dealer network.
2. Saving on marketing costs
Farley further noted that public advertising adds roughly $500 to $600 to a vehicle's cost. He believes that Ford's EVs may not need advertising "if we do our job." He also noted that Ford didn't advertise for its F-150 Lightning and E-Transit models. The company had to stop taking preorders for its F-150 Lightning after it got record reservations.
Farley was confident that Ford's EVs won't need advertising. He even went on to say, "If you ever see Ford Motor Company doing a Super Bowl ad on our electric vehicle, sell the stock." Tesla started a new trend by spending virtually nothing on advertising, while traditional automakers spend billions of dollars on it.
3. Saving on battery costs
Farley sees two ways to save on battery costs. One is by using cheaper battery chemistries like the LFP (lithium ferro phosphate) battery, which uses iron and phosphate instead of the more expensive nickel and cobalt used in NCM (lithium nickel manganese cobalt oxide) batteries.
Second, by designing simpler vehicles with better aerodynamics will reduce the battery size required. Simpler vehicle design will have the added advantage of saving on labor costs.
Is Ford's stock a buy?
Ford is laser focused on its EV targets. The company plans to spend $50 billion on EVs by 2026. This includes increased vertical integration to secure its battery supply and hiring the required talent to work on its EV ambitions.
If Ford manages to achieve higher EV sales and improved margins, its stock price should rise. The stock is trading at a forward price-to-earnings ratio of just 6.6. In short, if you are looking to invest in the stock for the long term, now could be a great time to enter.
