Beloved – Ford Motor Co. and its investors have long been held captive by razor-thin profit margins, weak growth and low valuations on Wall Street – and now is the time to break free.
That was the message Ford CEO Jim Farley and his leadership team delivered to investors and analysts at a capital markets event Monday in Dearborn.
“Self-assessments have been restricted for decades, and Ford is stuck in a box. “The industry is crowded. We let complexity overwhelm us when we try to be mature and stand out, to be for everyone,” Farley said. Long ago, in markets where growth slowed and demand evaporated every time we had a recession, we joked about a fragmented stock race.
Now, Ford has declared that it is in a “new era.” We have great potential to create.
Participants received a progress report on the plan, which Fairley and his team unveiled two years ago this month. A year later, they announced a major internal overhaul to split the company into three business units that mirror customer segments: Ford Model e, for EVs and software; Ford Pro, focused on business customers; And the Ford Blue, a cash cow that manufactures internal combustion engine vehicles.
Wall Street has received some new details, such as confirmation that Ford is developing a three-row electric SUV for a 2025 launch. Announcing several new agreements to lock in raw material supplies; And the expansion of the hands-free highway driving system Bluecruise next year. Locking down the raw materials needed for EV batteries is key as Ford plans to ramp up production to 600,000 EVs by the end of this year and 2 million EVs by the end of 2026.
The new electric SUV, according to executives, is aimed at families and fills a gap in the market for a white space product with an “affordable” price. Describing it as a “personal bullet train,” the company says it will take advantage of battery efficiency to achieve an estimated range of 350 miles.
The SUV will join the new electric pickup truck Ford has announced will grow as part of its second-generation EV lineup, a project dubbed the ‘T3’ that will be built at Ford’s manufacturing campus in Tennessee.
But of particular interest to investors and analysts were the key details executives provided on the way to Ford’s financial targets, a company-wide 10% and 8% in EV sales by 2026.
Dan Ives, an equity analyst at Wedbush Securities, said: “They were clear, they were detailed on the profit margins, and they laid out the blueprint for how they would be successful in electric vehicles – while protecting their main cash cow business. “They have issued a realistic guide, but it won’t back them into a corner. And I am proof of this. In other words, now you have the strategy, now it’s about execution.”
Ford shares were down less than 0.2 percent Monday at $11.63 a share.
Garrett Nelson, vice president and senior equity analyst at CFRA Research, said the stock’s move may reflect what he sees as a “ho-hum” phenomenon with little new information.
“It’s a bit disappointing because it was expected that there would be some news from this,” he said. But it was really anti-climactic.
Some analysts and investors had hoped to see the automaker raise its guidance for the year after a strong first quarter, but Ford on Monday reaffirmed its full-year financial guidance of adjusted earnings before interest and taxes between $9 billion and $11 billion.
“It doesn’t really change the way we look at the story,” Nelson said, adding that the company has a “buy” rating on Ford stock and sees the Dearborn automaker doing better than many of its competitors.
“Jim Farley has been in office for over two and a half years now,” he said. “It’s really a matter of killing and hitting targets.
More: ‘Moment of truth’: What Wall Street wants to learn from Ford next week
Profit margin bridges
Some of the key questions from Wall Street heading into the event were what Ford’s path to profitability in the EV business looks like, the growth outlook for Ford’s internal combustion engine vehicle business in the coming years and the company’s capital allocation needs — and they got some more detailed Monday.
The increase in revenue margins in the corporate and individual business segments was driven by volume and mix improvements, structural cost reductions and increased service revenue, among other factors, executives cited.
In the year By the end of 2026, they expect Ford Blue — the division focused on popular gas-powered vehicles like the F-150, Bronco and Maverick — to deliver low double-digit revenue margins, up from 7.2% in 2022.
“We are improving quality, reducing costs, improving our mix, increasing our average revenue per unit, increasing profit and generating cash,” said Kumar Galhotra, president of Ford Blue.
One strategy that is key to what Ford Blue is trying to do is use low-investment, high-margin vehicle derivatives – such as the high-performance Raptor model that started with the F-150 and has now expanded to the Bronco and Ranger.
“We deploy these vehicles from existing vehicles with relatively low investment,” Galhotra said. “These are about 80% similar to the base vehicle and deliver two to three times (earnings before interest and taxes) for every dollar of capital invested,” he said.
Another contributor to better margins is quality improvement, a concern for Ford that has resulted in higher warranty and recall costs. Ford Blue is working to reduce costs related to materials, goods and logistics.
Ford executives say the automaker has about $7 billion in losses compared to its traditional competitors, which it needs to offset. Galhotra said Monday that “most of that” is in ICE business.
He said the priorities for that business unit are improving quality, reducing costs and increasing revenue and profits. In addition to expanding Ford’s hybrid lineup and increasing its share of parts and accessories sales, he cited the derivatives strategy as a key key to improving earnings. So far this year, Galhotra said, the group has identified more than $500 million in annual savings.
Despite repeated claims that the ICE business will remain critical for years to come, executives have admitted more openly than they previously held that ICE volumes and margins will shrink as EV adoption grows.
“We think this will start after 2025 for us,” Galhotra said as ICE volumes continue to decline, “but the pace of EV adoption will vary by segment and geography.”
And Chief Financial Officer John Lawler expects Ford Blue’s margins to shrink “post-2026 … as the industry transitions to electrification.”
“However, given our unique strength in trucks, we believe our ICE business will be long-term and continue to generate free cash flow and returns,” he said.
Ford Blue will generate adjusted revenue of $3.3 billion in 2021, while its fleet business will generate $2.7 billion. In the year By 2022, the ICE business will grow to $6.6 billion, while the commercial vehicle business will grow to $3.2 billion. And this year, Ford is spending $7 billion on the Ford Blue and $6 billion on the Ford Pro.
By 2021, Ford’s EV business will lose $900 million. By 2022, those losses grow to $2.1 billion. This year, Ford expects to lose $3 billion in its EV business — a fact that has raised doubts among investors and analysts about whether Ford can hit an 8% revenue margin on EVs by 2026. Monday’s event aims to put some doubts to rest. .
Ford executives previously said they expect the company’s first-generation EVs contribution margin to break even by the end of this year, and that the company’s first-gen EVs will reach positive profit margins next year.
With the Model E, the company expects to see better financial results from improved input costs as employees refine vehicle designs and gain other efficiencies and benefit from lower commodity costs, Lawler said. And, among other things slated to boost EV margins, executives expect digital and physical services — including Blue Cruise — to contribute 20 percent of Model E revenue by 2026.
“I think the initial reaction might be muted, but I think this has set up a successful strategy that, if implemented, is a very undervalued stock,” Wedbush’s Ives said. It will be received positively in the coming days and weeks.”