If you're investing in the automotive industry, you likely already know how important full-size trucks are to Detroit automakers such as Ford Motor Company (F 0.73%). The F-Series has been its bread-and-butter for many decades, but Ford's most important vehicle going forward will likely be a different version.
Is Ford's recent move to slash prices of the F-150 Lightning, the electric truck version of its predecessor, a sign of struggles, or will it spark sales of its incredibly important electric vehicle (EV)? Let's dig in.
Cut here, slash there
Toward the end of July, Ford announced it would slash prices of its F-150 Lightning electric trucks between $6,000 and $10,000 -- depending on vehicle options and trims. Management's decision was made easier due to lower material costs and higher production capacity.
However, many investors took the announcement a different way, seeing it instead as a move to offset weakening demand. That sentiment doesn't take into account that even after Ford's recent price cuts the F-150 Lightning is still roughly $10,000 more expensive than originally planned two years ago. Essentially, it's just softening the price increase caused by the microchip shortage felt across the industry.
What makes this incredibly important is that the F-Series has long driven a massive chunk of Ford's profits, along with other large vehicles such as SUVs. Just a few years ago, Morgan Stanley analyst, Adam Jonas, wrote in a note to clients that the F-150 truck franchise might be worth 150% of Ford's enterprise value at the time. To say that Ford's trucks drove company results might be putting it lightly.
Detroit automakers have successfully cornered the U.S. truck market and long protected their territory from Japanese automakers. Going forward, the F-150 Lightning will have to drive similar profitability in similar volume as the world's fleet strives to become fully electric, or don't expect investors to be along for the ride.
The Lightning's failure to become a pillar of profit down the road, similar to its internal combustion engine predecessor is now, could be catastrophic for the iconic Detroit automaker. But will it succeed in its mission to boost F-150 Lightning sales, and quickly?
Ford's pressing the accelerator
Ford clearly sees the importance and is willing to endure a six-week plant shutdown that will hurt production in the near term but triple F-150 Lightning output by the end of this year. Already the price cuts have driven a threefold increase in web traffic and a sixfold increase in customer orders, according to Ford.
Image source: Ford Motor Company.
What's even better for investors is that as production increases and customer delivery times shorten, high-demand trim levels such as the XLT -- which accounts for over 50% of new orders -- will hit the roads first, and those come with juicier margins.
Ford's increased production can't come soon enough because more competition is on the way. Already Rivian Automotive's R1T has hit the roads with rapidly growing deliveries, Tesla's Cybertruck and General Motors' Chevrolet Silverado EV are on the way soon, and Stellantis' Ram 1500 Revolution will join them all next year.
The bottom line
For investors of Detroit automakers, big trucks equals big bucks. Because of the transition to EVs, many investors are concerned that automakers such as Ford might not continue their decades of truck dominance. Nobody is quite sure how consumers' loyalty will change or if the temptation to try new brands amid the EV transition will be more enticing.
These trucks drive big margins for Ford and will, in a sense, fund the transition to EVs while EV start-ups -- aside from Tesla -- struggle to turn their first profits. Ford slashing its prices, which still remain higher than originally anticipated, and quickly ramping production is a sign of just how important the F-150 Lightning will become. Will the price cuts spark sales later this year? Investors should probably count on it.
