By Zimele Mbanjwa
The Ford Motor Company is a global automobile producer that was founded in 1903 by Henry Ford who sold automobiles that he designed and engineered. It is said that by 1920 around 60% of all vehicles on the road were Fords. The company has since evolved into a multinational automotive player that designs, manufactures, markets, and services vehicles such as Ford trucks, sport utility vehicles, commercial vans and cars, and Lincoln luxury vehicles, whilst also offering a variety of connected services. Currently at the helm are Executive Chairman of the Board, William 'Bill' Ford, and the President and CEO of the company, Jim Farley.
Up until 31 December 2022, Ford primarily reported across three operating segments: Automotive, Mobility, and Ford Credit. From 1 January 2023, as part of its Ford+ initiative, which is the company's new growth and value creation plan, Ford implemented a new reporting structure as it separated its operating model into five reporting segments: Ford Blue, Ford Model e, Ford Pro (which combined form the previous Automotive segment), Ford Next (formerly the Mobility segment), and Ford Credit. One of the advantages of the new segmentation is that it provides more transparency and accountability by each business segment. The separation of the Automotive segment into three distinct business is also aimed at enhancing the customer experience whilst fostering lifestyle enhancing technology and products as the group aims to generate profitable and sustainable growth.
Automotive - Blue, Model e and Pro
The company generates the bulk of its revenue through sales of vehicles, parts, accessories, and services across the Ford Blue, Ford Model e, and Ford Pro segments. Revenue is recognised when control is transferred to the group's customers (which are typically dealers and distributors), through wholesale. All vehicles and parts are then sold to the end-user through the dealers and distributors, which are mostly independently owned. As of 31 December 2023, Ford approximated the total number of approved dealerships at 9 527 worldwide.
Ford Model Blue
The Ford Blue segment makes up the bulk of the formerly Automotive segment's revenue - averaging around 60% of total group revenue and 66% of units sold. Ford Blue primarily sells Ford and Lincoln internal combustion engine (ICE) and hybrid vehicles, service parts, accessories, and digital services for retail customers, together with the associated costs of development, manufacturing, and distribution. This segment also lends its hardware engineering and manufacturing capabilities to Ford Model e and in some instances, it also manufactures vehicles on behalf of Ford Pro. Additionally, it also sells to markets not currently in scope for Ford Model e or Ford Pro (so outside the US and Canada) including some electric vehicle (EV) sales by affiliates in China. Ford Blue houses some of the most iconic and popular models such as the F-Series, Ranger and Maverick trucks, Bronco and Explorer SUVs, and the Mustang sports coupe.
Ford Blue is seen as the industrial core of the company, with three main strategic priorities - improvement of quality, reduction of costs, and growing of revenue and profit. The division is targeting a low double-digit EBIT margin by end of 2026 (3Q23: 6.7%, FY22: 7.7%).
In FY23, Ford Blue saw an increase of 3% in volumes due to improvements in production-related constraints, but this was offset by the ceasing of production of the EcoSport and Fiesta small vehicles as well as production losses during the United Auto Workers (UAW) strike. Ford Blue revenue grew 8%.
Ford Model e
This division is considered by the company as being the heart of Ford's innovation and growth ambitions as it further entrenches itself in EVs and digital experiences. The segment focuses primarily on the development and sales of EV and digital vehicle technologies. It also develops key technologies and capabilities such as EV platforms, batteries, e-motors, inverters, charging stations and battery materials recycling. Ford Model e operates in North America, Europe, and China, and offers limited services in Mexico. Some of the more notable names in this division include the Ford GT Mustang Mach-E and the F-150 Lightning pickup truck.
In FY23, Ford e units sold increased 21% y/y, reflecting higher production of the F-150 Lightning. This improvement drove a 12% revenue increase for the division despite lower pricing.
Ford Pro
The Ford Pro segment mainly sells Ford and Lincoln vehicles, parts, accessories, and services to commercial customers, government agencies, and for rental purposes. It accounts for 31% of all units sold and 33% of revenue. This segment offers all the core Ford Pro vehicles such as Super Duty and Transit vans in North America and Europe, and the Ranger in Europe. Ford Pro sells vehicles with different types of engines, including ICE, hybrid, and EVs, whilst also providing services to help customers manage and maintain their fleets, such as telematics and EV charging solutions, financing, and services and support on Ford and non-Ford products. Ford Pro operates only in North America and Europe.
During FY23, the Ford Pro segment increased volumes by 6% y/y on lower supply constraints, despite losses due to the UAW strike. Revenue grew by 19% due to higher net pricing and volumes, offset by an unfavourable mix. Indeed, the volumes sold and revenue generated highlights a trend that has been present in recent years for Ford, where revenue growth has outstripped sales growth, reflective, for the most part, of higher net pricing.
Ford Credit Next & Ford Credit
The Ford Next (<1% revenue) segment primarily includes expenses and investments for emerging business initiatives aimed at creating value for Ford in vehicle-adjacent market segments, and Ford Credit (~6% revenue) is centred around the provision of vehicle financing and leasing services.
Industry dynamics and market share
Around 88% of Ford's unit sales in the US, which accounts for ~48% of total sales, are for ICE vehicles, while the remainder is for by hybrid vehicles (~7%) and electric vehicles (~5%). Based on unit sales, Ford is currently the sixth biggest vehicle manufacturer in the world but is only 19th in the global EV market. The company's market share trends for both traditional ICE vehicles and EV (incl. Hybrid) types have been relatively stagnant as of late. In early 2020, global vehicle sales declined sharply due Covid-19 related constraints which saw a sharp decline in production as manufacturers shut down, while consumers also pulled back on big ticket expenditure due to restricted mobility and dealership shutdowns. In addition to this, in early 2021 Ford, and some other industry players, were impacted by a significant shortage of semiconductors as producers re-allocated capacity to meet increased demand for consumer electronics during the Covid-19 pandemic amid industry-wide plant closures by automotive OEMs. As such, since early 2020, Ford has lost about 0.9ppts (Since 1Q18: -1.9ppts) of its global overall vehicle market share and has rerated from a post Covid-19-boom driven peak of 6.6% seen in 4Q21 to about 5.9% in 3Q23.
On a compounded annual rate basis, between FY18 and FY23, wholesale units have declined by 5.9% per year, while revenue per unit sold has increased at 8.7% per year. The group has pointed to semiconductor shortages and inflation-driven costs in the overall industry putting upward pressure on prices and downward pressure on volumes over the last few years. In 2023, despite some reprieve from the previous semiconductor shortage, production issues persisted for the group due mostly to labour shortages at suppliers. Additionally, due to depressed consumer spending, price competition picked up, with various competitors offering discounts to gain market share and satisfy high production levels. More of these actions are expected in 2024 as industry production and inventories improve.
The Electric Vehicle (EV) Market
The total EV market grew from 1% of the total global vehicle market in 1Q18 to ~20% by 3Q23, driven by strong growth across various manufacturers in line with the global sustainability and clean energy trends. This growth was led by major players like BYD (leading EV manufacturer globally) and other Chinese manufactures, as well as Tesla (second biggest EV manufacturer globally). The EV boom has been well supported by governments in furtherance of climate mitigation goals through massive subsidies. Notable is that most of the growth in EVs has been concentrated in China (~52% of the overall market) where EV makers hold a competitive advantage due to generous government subsidies, tax breaks, procurement contracts, and other policy incentives. In 2023, Ford only sold 11.7% of its vehicles in China - most of which were ICE. Between 2020, when the global EV market really started to boom, and 2022, the global annual compounded growth of EV sales was ~80% per annum, while Ford's EV sales during the same period grew just 0.5% annually, bringing its market share to just 1.2% globally. Indeed, the EV boom has benefitted mostly Chinese manufactures and has resulted in intense price competition to claim market share. According to Bloomberg, ICE vehicle sales peaked in 2017 and are expected to be 39% lower by 2026, further emphasising the need to scale the EV market for brands like Ford before the main global EV markets (Asia, Europe, and North America) begin to saturate it in the late 2030s when sales growth would have rapidly slowed.
Financial performance
Revenue
In FY23, Ford reported sales of 4.41 million units at a wholesale level, an increase of 4% y/y, while revenue per unit sold rose 7% y/y. Group revenue in FY23 increased 11.4% y/y to $165.9 billion (excl. Ford Credit), driven by growth in the automotive segment: Ford Blue (+7.6%), Ford Model e (+12%) and Ford Pro (+18.6%). This was ahead of consensus expectations at the time.
Profitability
In FY23, Ford reported adjusted operating profit of $10.4 billion (flat y/y), with the margin declining by 70bps to 5.9%. This performance reflected a more than doubling of the adjusted EBIT loss in Ford Model e to $4.7 billion, and a 50% decrease in Ford credit, which offset 9% growth in Ford Blue, 124% growth in Ford Pro, and an 85% lower y/y loss at Ford Next.
Nevertheless, adjusted diluted earnings per share (EPS) improved 7% y/y to $2.01, ahead of consensus estimates of $1.87.
Balance sheet
As 31 December 2023, the cash position (excluding Ford Credit) was $28.8 billion, down 11% y/y. This remains 44% above the company's long-term target of $20 billion which is meant to withstand potential stress scenarios, meaning it has resources available to invest in and grow the business.
Net cash provided by operating activities was $14.9 billion, an increase of $8.1 billion y/y, primarily driven by higher net income. Adjusted free cash flow was $6.8 billion, $2.3 billion lower y/y, due to the non-repeat of working capital improvements and Ford Credit distributions, as well as higher capital spending.
Debt stood at $19.9 billion, flat y/y, translating into a net cash position of $8.9 billion.
Outlook
Management's outlook for FY24 is positive, with most profitability metrics ahead of consensus expectations and FY23, while free cashflow generation is expected to be ahead of analyst expectations.
Investment Case Summary
Risks
Consensus considerations
Valuation
Ford is trading on a 12-month blended forward PE ratio of 6.6 times, which looks quite attractive compared to its history, with the market pricing-in decent earnings growth to come.
Compared to five of the leading vehicle ICE manufacturers, the company trades at a slight premium of 12% - but lower than its average premium over the last five years of 28%.
