Typically, when someone needs to buy a new car, the first thing they do is fire up the computer and start shopping online. From there, they can decide on the make, model, options, and whether the price suits their budget. Traditionally, the next step is to make the journey down to the dealership that has the exact car they desire.
While at the dealership, the customer will have to make the transaction through a salesperson who will try to upsell them on options they've already vetted online. After haggling on price, the salesperson will have to "check with their manager." Once the customer completes the cumbersome process, they will have to go through a financing rigmarole where an in-house credit analyst will secure financing for the customer.
By the time they finish the entire process, the customer may finally get the car they already knew they wanted. Assuming they weren't upsold, that is.
Tesla's dealership model cuts out the middleman
Being the disruptor it is, Tesla (TSLA +0.97%) forged its own path when it began selling its hip all-electric vehicles (EVs). It cut out the dealerships and sells its cars directly to the customer through its website. No haggling, no upselling, and financing can be done from a couch.
Tesla does have dealerships, but they function as a gallery to show off cars and as a location for customers to pick up their new rides. Unlike traditional independently owned dealerships that must issue a markup to generate profits, Tesla's dealerships are company owned.
Ford is making sweeping changes that reflect Tesla's dealership model
Ford (F +0.21%) is issuing an ultimatum to its dealers. If they want to sell Ford's electric vehicles, they'll have to invest their money in charging stations and introduce no-haggle pricing for electric vehicles. The new rules also restrict the dealerships to a limited amount of electric vehicle inventory on their lots. Dealers can opt into the new rules by 2024 or lose their exclusive rights to sell Ford vehicles.
Image source: Getty Images.
Ford CEO Jim Farley warned dealers that the changes might be brutal. But by bypassing the dealers, the company can save about $2,000 per vehicle. To add some perspective, Ford sold an average of 6,247 vehicles per year between 2014 and 2019 before the pandemic distorted car sales. Ford forecasts that half of its 2030 car sales will be electric. At a similar clip of sales before the pandemic, Ford would sell roughly 3,124 EVs that year. A $2,000 per-car savings would boost profits by $6.25 billion.
Over the same six-year span between 2014 and 2019, Ford's net income was just over $4.1 billion on average. So, the cost savings by cutting out the middleman could make a profound impact on Ford's bottom line. These are, of course, back-of-the-envelope calculations, but you can clearly see why Farley is pushing these changes in Ford's distribution model.
Is Ford a buy right now?
Tesla found loopholes in several states to avoid the laws when it was a start-up. It also put many company-owned dealerships on Native American reservation land where state law is not applicable. To implement a similar standard, Ford must deal with state laws requiring cars to be sold through a dealership and inevitable pushback from its dealers. So, the process could take a few years.
NYSE: F
Key Data Points
The stock currently trades at a price-to-earnings ratio of about 4.5 times. Before you rush out and buy shares, know that that valuation is based on inflated earnings per share over the last 12 months, as vehicle prices have been through the roof. But a normalized valuation is still very attractive. Ford's average earnings from 2014 to 2019 was $1.04 per share. The current stock price of $13 implies a normal price-to-earnings ratio of about 12.5 times. That's quite an appealing valuation for a company whose earnings could proliferate over the next several years.
Yes, macroeconomic uncertainty could be weighing on investors' minds. A slowdown would not be good for Ford, but predicting the future macroeconomic environment rarely works. Long-term investors buying shares today could see the shares drop in the short term, but the company has significant prospects in the long run. While you wait for the better days, the stock will pay you a dividend yield of over 4.5% at the stock's recent price and payout.
