Will Ford’s EV Gamble Pay Off?

As we race towards the end of 2024, a full 17 million electric vehicles are projected to be sold, which if realized will translate to a whopping 1 in 5 of all car sales.

With demand for EV’s as strong as ever and competition from Tesla and China’s BYD stiffening, what does the future hold for Ford and its EV strategy?

Key Points

• Ford has shown strong revenue and earnings growth, but recent quarters have seen slower growth and cash flow challenges.
• Ford’s cautious EV strategy has seen widening losses in its Model e segment.
• Strong competition from Tesla and BYD, coupled with delayed EV investments, makes future success uncertain. 

Strong Dividend + Rising Revenues

Ford has been a leader in the U.S. auto industry since its start in 1903 but longevity is no guarantee of success in the automobile manufacturing world. Throughout its more than 120-year history, Ford has been a runaway success and on the brink of bankruptcy.

Among the worst periods, when automakers were severely affected by supply chain disruptions was at the turn of this decade. Subsequently, Ford managed to increase both its top and bottom lines, and revenue has continued to grow over the past three years.

For fiscal 2022, Ford’s total revenue grew by 15.9% year-over-year to $158.06 billion, and in fiscal 2023, the top line reached $176.19 billion, an increase of 11.5% from the prior year.

The bottom line also expanded as operational efficiencies were achieved. Ford’s adjusted earnings per share grew by 18.2% from 2021 to $1.88 in 2022. In 2023, this figure increased again by 6.9% year-over-year to $2.01.

In the first quarter of fiscal 2024, Ford’s revenue climbed by a more modest 3.1% from the prior year’s quarter to $42.78 billion. This lackluster growth was primarily due to a decline in vehicle shipments.

While liquidity does not appear to be in jeopardy, the company did report an adjusted free cash outflow of $479 million, reflecting working capital effects from about 60,000 vehicles that were in inventory at the end of the reported quarter and expected to be shipped in the second quarter.

We must reiterate that liquidity does not look bad for the company. Sure, it has a $18.6 billion of long-term debt on the balance sheet but it also has $12.5 billion in cash and $13.9 billion in short-term investments.

An indicator of management’s confidence in the balance sheet is the high dividend still being paid. The company has an annualized payout of $0.78 per share yielding a high 6.92% at the current price level, with a low payout ratio of 13.78%.

How Is Ford Motor’s EV Strategy Going?

In step with the automotive industry’s push toward EVs, Ford has sought to electrify its commercial fleet, starting with its most iconic models like the Mustang, F-150, and Transit. This effort led to Ford becoming the second-largest EV brand in the U.S. in 2022. Currently, Ford offers several EV and hybrid models.

The goal for electric commercial vehicles has always been to lower the price point to better penetrate the market, and Ford is no exception. This electrification initiative also aligns with the company’s long-term target to be globally carbon-neutral by 2050.

Ford’s Model e segment—dedicated to electric vehicles—was launched with big ambitions but its financials don’t clearly reflect whether it has delivered on those ambitions.

For example, in the first quarter of 2024, the segment’s volume decreased by 20%, while industry-wide pricing pressures led to an 84% drop in revenues. The segment also incurred higher EBIT losses compared to the prior year’s period.

On a positive note, the Ford Pro segment is a standout performer and the Ford Blue segment remains profitable despite headwinds, the Ford Model e segment has consistently posted losses. Can management break the losing streak and is Ford ever going to be profitable?

There is a glimmer of hope from Ford’s recent second-quarter operating metrics. The company’s electric vehicle sales increased by 61%, with 23,957 units sold in the quarter, and are up 72% for the year. Additionally, Ford boasts the best-selling electric truck in the industry, the F-150 Lightning.

On the other hand, the company is currently relying more on its hybrid lineup than on pure EVs. For example, late last year, Ford postponed a $12 billion investment in new EV manufacturing capacity, citing customer reluctance to pay a premium for an electric vehicle over an internal combustion or hybrid alternative.

This year, Ford delayed the market launch of its three-row electric vehicles at the Oakville, Ontario, assembly complex from 2025 to 2027. However, plans for its BlueOval City campus and Ohio Assembly Plant remain intact.

The losses suggest Ford may be better to tiptoe into the EV space rather than plunge head-on, but what are the chances that will happen?

Will Ford Succeed in Electric Vehicles?

While Ford’s electric vehicle division has been a money loser, the century-old automaker has succeeded in creating electric versions of the highly popular Mustang and F-150.

Ford seems to be taking a slow, steady approach to its EV strategy to maintain its market position. With that said, winning a larger market share may be difficult given Tesla’s dominance and the encroaching threat from Chinese automaker, BYD.

Nonetheless, as the market grows, so does each company’s share of the pie and that alone can be a benefit to Ford. Even so, it might be wise to wait and see, perhaps until the company’s EV-related segment breaks into profitability.

Ford is currently trading at a relatively low valuation. Its price sits at 7.01x its forward non-GAAP earnings, which is lower compared to the industry average and its own five-year average multiple. The current P/E is just 11.5x, which is on the low end for a Fortune 500 stock.

Analysts seems to be swinging from bearish to bullish on Ford with 13 analysts raising their estimates for the upcoming quarter, and the consensus fair value price target sitting at $13.43 per share, 19% higher than the present share price level.