Ford (F -1.92%) is trying to use the disruption electric vehicles (EVs) brought to the automotive industry to change investors' perceptions of the company and the stock. The company isn't abandoning its legacy internal combustion engine (ICE) offerings, but it has also been focusing on growing an EV product lineup that it hopes will drive future profits.
The company's just-released first-quarter report is the first time it breaks down those two segments and its commercial vehicle results for investors. The company hopes that will unlock value and drive shares higher. Here's how investors can use that new information to see if the stock's lackluster performance over the past five- and 10-year periods might be about to change.
The EV push
Ford plans to move aggressively to become a meaningful competitor to EV leader Tesla. It plans on achieving an annual production run rate of 600,000 by the end of the year with the product mix shown below.
Image source: Ford Motor Company.
The company is also looking ahead and this year expects to have secured all the battery raw material supply contracts it needs to be producing EVs at the rate of 2 million per year by the end of 2026.
There's good reason for the company to push its EV production rate higher so fast even though it wants to maintain its legacy fossil fuel-powered vehicles. Global EV sales have the potential to become nearly a $1.4 trillion market by 2027.
Ford wants to have a 2 million unit annual run rate by the end of 2026 to tap into a huge market.
A peek inside Ford
What investors need to determine is the likelihood that Ford contains costs, improves quality, and is able to take a meaningful share of that market. The company thinks that offering more details to help evaluate those chances will spark more investor interest in the stock. That's exactly what the first-quarter report now offers.
The company now reports data separately for its legacy ICE and hybrid vehicle business (Ford Blue), its new EV segment (Ford Model e) and commercial-focused vans and trucks (Ford Pro).
Ford is still counting heavily on its legacy businesses to fund the EV segment.
Where to focus now
In the company's fourth-quarter 2022 earnings call, Ford CFO John Lawler pointed out that costs in the production process have been 25% to 30% higher than they should be. Poor quality has also resulted in additional warranty, as well as brand reputation, costs. Production efficiency is the first area investors need to keep an eye on. Discussions of quality improvement from management should follow.
Investors analyzing Ford as it executes its Ford+ strategy and transitions to a meaningful volume of electric vehicle offerings should also monitor the company's market share trends. Ford said it had 5% global market share in 2022. That was a slight decrease from 2021 and down from 6% share in 2019 prior to pandemic disruptions. Market share remained at 5% in the 2023 first quarter.
Not surprisingly, Ford's profit in the first quarter came from its Blue and Pro segments which each generated operating margins of greater than 10%. It also lost money on every EV sale as it works to ramp up production and sales there. For context, Ford's overall operating margin in 2022 was 6.5%, which it didn't break down by segment at the time. It was also interesting to learn that a full one-third of automotive revenue came from Ford's commercial products in the first quarter.
Worthy investment or not
The stock price should follow the company's ability to show consistent, or growing, profitability. As shown below, that hasn't been the case over the past two years, as the company struggles with costs and quality.
Data source: Ford. Chart by author.
GAAP net income includes gains and charges unrelated to the operations, but adjusted earnings before interest and taxes (EBIT) has also been inconsistent. Investors don't seem to think that metric will be consistently strong or will increase over time, based on the stock's performance. Now that the company is breaking down performance by segment, investors will have a better idea of what specifically needs to improve.
The EV segment is basically the equivalent of a start-up business. That's where the potential growth resides and is certainly a key area for investors to watch. But the profitability from the other operating segments needs to improve over the long term.
The first quarter provided an initial snapshot into those details. The EV business will take years to grow. But if investors see improving margins in the Blue and Pro business over the next few quarterly periods, that could be the time to buy Ford stock ahead of any EV success.
