There is a lot going on in the electric vehicle sector at the moment with growing skepticism about whether conventional vehicles will replace combustion vehicles.
And then there’s the competition out of China like BYD and whether it will disrupt Tesla and others?
With so many moving parts, where does Ford fit into the fray? Has its relative underperformance created a market opportunity?
How Has Ford Motors Done Compared to Tesla?
Domestic automaker Ford Motor Company (NYSE:F) is facing the heat from slow growth over the past few years that has weighed on the stock. Over the past three years, the share price fell by close to 40%, while over the past three months, Ford’s stock has shed by more than 5%.
For a company of Ford’s caliber, the price is starting to look inexpensive, sitting at just 7.22x forward non-GAAP earnings and only 0.23x forward sales. So, is this an opportunity to snap up Ford and has it become an undervalued diamond in the rough?
There is no doubt that Ford has lagged the gold standard of the EV industry, Tesla, Inc. (NASDAQ:TSLA) on the most important financial metrics, from growth to margins.
Over the past five years, Ford’s overall top line has grown by an average year-over-year rate of 10%, while, Tesla has an average year-over-year total revenue growth rate of 36% – and that’s after bumping into a series of issues slowing growth.
Ford has last reported Q4 of $44.9 billion in automotive revenues, better than the $43.02 billion that analysts had been expecting.
Breaking down the financials further, there is not much to be excited about. The Ford Blue model with conventional combustion engines clocked in revenue growth of 4% from the prior year’s period, while the Ford Model E segments, serving EV buyers, saw a notable 11% decline in revenues. On a full-year basis, Ford Blue’s revenue was flat year-over-year, while Model e had a 35% decline.
Despite cost reductions, the electric vehicle segment recorded a $5.08 billion loss in EBIT last year. Indeed, it was Ford’s conventional segment and Ford Pro subscriptions that inflated automotive revenues higher to beat expectations. That’s another way of saying that management has a lot of work to do when it comes to EVs.
Last year, Ford was also faced with high warranty costs and an industry-topping record of recalls. This led to the company taking the decision to change its quality head and aim for lower costs in this department.
What Are Ford’s Expectations After These Results?
Ford is not seeing gains from the once heavily touted EV transition. So, while the top brass has expressed hope about the future of electric, they have equally been skeptical and about optimistic forecasts.
Management has acknowledged they are facing tough headwinds on the policy front. First of all, the Trump administration is in the process of imposing tariffs on imports, which will add to the already high-ticket prices of EVs. Consumers are believed to factor in such policy changes when making car-buying decisions.
The company has factored in consumer demand pullbacks into its own projections. Ford’s CEO, Jim Farley, made it clear that 25% tariffs on Canada and Mexico for a prolonged period would have an impact on the automobile industry big time. The company pointed out how it affects a lot of factors, such as how suppliers react. Following these market factors, Ford is expecting pricing to dip to the tune of 2% over the course of the year.
The company has turned its attention towards pushing up the top line. For instance, the economies of selling a high-ticket vehicle can be realized when the company ramps up volume like it is trying to do through its European launches.
Another initiative squarely in management’s focus is cost reduction. Ford is aiming for lower warranty costs and is expecting a whopping $1 billion drop in material and warranty costs this year. The company reduced costs by a lot last year but it was offset by the warranty and quality issues.
In addition to this, Ford has actually slashed bonuses for its managers. This was done to have a two-pronged effect. The first is the obvious one, i.e., reduction in costs. The second one is to incentivize workers for better efficiency.
Is Ford Stock a Bargain?
Ford stock is not a bargain in the eyes of 25 analysts covering it who have a consensus $10.80 per share target, just marginally above the current share price.
The 7.71% dividend and low PE ratio of just 6.6x are undoubtedly reasons to be attracted to F as a value investor but it seems that Ford really is sledding uphill against increasingly difficult competition from Tesla and Chinese company BYD.
With $185 billion in sales it’s almost unimaginable that the market cap is just $38 billion but the real concern is whether the balance sheet will hold up against any downturns given that the long-term debt levels now sit at a lofty $18 billion.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.