Automakers are in the midst of a transformational period as they rev up their transition to electric vehicle making. Among the contenders in this fierce competition is Ford Motor Company (F -1.92%). Its shares have sputtered a bit in the past five years, up by only 45% versus the S&P 500's 53% gain over the same period.
But the legacy automaker hopes to turn over a new leaf by transitioning to electric vehicles (EVs). Let's explore how this transformation could play out over the next five years.
What can Ford's present tell us about its future?
After nearly collapsing in the Great Recession and financial crisis in 2008, the U.S. auto industry has sought to reinvent itself. And while Ford held up better than its peers, like General Motors (which went bankrupt in 2009) and Chrysler (now part of Stellantis), it emerged from the crisis with a sprawling and inefficient business model that struggled to translate its vast sales into consistent profits. In 2018, management embarked on a massive global restructuring to help fix this problem.
Over the subsequent years, Ford would exit unprofitable international markets like India and Brazil, trim thousands of white-collar jobs, and discontinue all sales of passenger cars in North America (except the Mustang) to focus on more-profitable trucks and SUVs.
Most recently, management split operations into three reporting segments: Ford Blue (gasoline-powered cars), Ford Pro (utility vehicles), and Ford Model E (electric vehicles). Third-quarter earnings highlight these new dynamics.
Revenue increased by a respectable 12% year over year to $45 billion, while adjusted earnings before interest and taxes increased slightly to $3.8 billion. The restructuring has streamlined its legacy operations (Ford Blue and Ford Pro) and turned these businesses into reliable cash cows that can help fund its pivot to new opportunities.
EVs are the future
According to analysts at Goldman Sachs, EVs are projected to represent half of global car sales by 2025, with that percentage rising to 85% in Ford's home market, the U.S. Against this backdrop, car companies must quickly transition to this new technology to protect their long-term relevance. But that is easier said than done.
Competition is heating up, leading to significant margin pressure as automakers slash prices to maintain their market share.
Image source: Getty Images.
In the third quarter, Ford Model E sales jumped 39% year over year to $1.8 billion, but the segment has an EBIT margin of negative 58.9% and burned through $1.08 billion. Chief Financial Officer John Lawler cautions investors to look at the business as a start-up within Ford.
He has a good point. Unlike smaller pure-play EV rivals, such as Rivian Automotive or Lucid Group, Ford's legacy operations will help subsidize the losses as its EV business scales up, freeing it from the risk of bankruptcy.
Ford expects its Model E segment to be profitable on a pre-tax basis by late 2006. The company's well-known brands and network of dealerships could help give it another edge over pure-play rivals.
What about the near-term challenges?
While Ford's future looks bright as it transitions to EVs, the company faces some near-term challenges, particularly with its negotiations with the United Auto Workers. Unionized workers are striking at several of its North American plants, demanding higher pay and shorter workweeks, and a compromise is yet to be reached.
From an investor perspective, labor disputes are a massive overhang for the stock. And even if the issue is resolved now, it could reemerge. The good news is that Ford's shockingly low valuation of just 5.9 times forward earnings seems to price in this potential headwind. The shares look like a hold -- or possible a buy when more information becomes available.
