One of the best tips for investing in companies is to invest only in businesses you understand. That's why many investors are attracted to the automotive industry, as vehicles have often been a part of our daily lives for decades.
Ford Motor Company (F 0.08%) is an iconic automaker, but is it the car company you think it is? Did you know that passenger cars generate less than 3% of Ford's U.S. sales? Did you know its finance arm is more profitable than its international automotive markets combined?
Let's peel back the layers of the Detroit automaker for investors to better understand what drives the company.
Revenue breakdown
Ford is a massive global automaker, but if a picture is worth a thousand words, this fourth-quarter graphic begins to explain just how important North America is to Ford.
North America generated 55% of Ford's total automotive wholesale units during Q4, but that chunk of sales generated 74% of automotive revenue and 107% of total automotive EBIT. Yes, that last figure is accurate -- more on that in a second.
On the flip side of North America's strong results, Europe generated 23% of Ford's automotive wholesale units during Q4, but only 15% of automotive revenue -- and it wasn't profitable.
The story is similar with Ford's unprofitable operations in China, which accounted for 10% of sales during Q4, but not even 1% of revenue. Because Ford's operations in Europe and China -- two key overseas markets -- aren't currently profitable, North America generates more profits than the total automotive segment.
There's a large reason why Ford generates lopsided and favorable results in North America.
Why the lopsided results?
The U.S. has always loved SUVs and trucks, and those larger vehicles carry higher price tags and margins. The difference in profitability is so drastic for Ford that it made an unprecedented move in 2018 to slam the brakes on being a full-line automaker in the U.S. and slash its passenger-car lineup down to higher-margin performance models -- basically, the Mustang.
In fact, as the company moves away from cars and emphasizes SUVs, trucks, and electric vehicles (EVs), Ford's passenger cars represented only 2.6% of the automaker's U.S. sales in 2022. Ford will likely follow a similar strategy in Europe, as it has already said goodbye to a highly popular Fiesta model, and will send the Focus to the same fate by 2025.
Ford's move to end production of the Fiesta and Focus is a big change. Consider that nearly a decade ago those two small vehicles generated roughly 50% of Ford's sales in Europe alone. Since then, however, Ford's SUVs have blossomed in the region and, while 2022 sales data in Europe isn't available yet, the mix will probably still be 30% to 35% passenger cars, not including Ford's commercial vehicles -- far higher than in the U.S. market.
To put it simply, due to the sales mix of vehicles overseas favoring smaller vehicles, business for Ford simply isn't as lucrative as it is in North America. The revenue breakdown only scratched the surface of understanding how important North America is to the automaker.
There's another interesting component of the automaker investors might overlook with Ford. Its financing arm has been a secret weapon of profits for years.
Ford Credit
Ford Credit is Ford's financial services subsidiary that provides automotive financial products and services to dealers and their customers. For investors, it can be a love/hate affair because when vehicle prices are moving higher and the economy is humming along, Ford Credit can drive billions in profits annually.
However, when vehicle pricing and the economic environment go in the opposite direction, Ford Credit can turn from billions in profits to billions in losses. For the vast majority of years, though, Ford Credit is a strong asset and advantage for the automaker. It generated $2.7 billion in EBT in 2022, far more than Ford's South America, Europe, China, and International Markets Group combined.
It's always smart to dig deeper
Ford may not be the automaker you think it is. The company is slamming the brakes on passenger vehicles, and its business overseas is far less lucrative than investors might realize. In addition to its overseas profit struggles, Ford also has more issues to fix internally that became more evident during the fourth quarter. It also generates a healthy profit from Ford Credit, an entity that won't be found on a map.
But now you better understand what drives Ford's bottom-line profits, and why, and that's exactly what investors should consider when looking to understand and buy stocks.
