Is Ford Gambling On Its Future?

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Ford Motor Company (NYSE: F) announced a change in its executive team earlier this month. Mark Fields, who took over the CEO post in July 2014 and oversaw the two most profitable years in the company’s history on a pre-tax basis, will be replaced by Jim Hackett, former board member and head of Ford’s future technology subsidiary. A number of other management changes also took place. This move followed a near 15% decline in the company’s stock price over the past few months. It is always dangerous to rationalize from stock price movements, but there are many possible reasons for the decline, some warranted and others unwarranted.

The first of these is that Ford failed to effectively communicate how it plans to negotiate the future auto market. As we’ve written about extensively, the idea of what it means to use a vehicle as a means of transportation is undergoing a profound shift. The combined impact of the improvement of electric battery technology, lowering in the prices of lithium-ion batteries that power electric vehicles, development of autonomous driving capabilities by large and small companies, and the growing popularity of ride sharing services has changed the future expectations of auto investors completely.

In order to understand just how profound this shift is consider the following: currently, in order to own a vehicle, the customer has to pay for a number of things. These include the design and manufacturing of the vehicle, its transportation and sale by the dealership, its fueling and maintenance, its registration and insurance etc. The way these services are provided are distributed across many different types of businesses but each part is necessary to keep the whole thing going. Newer companies and technological changes are now chipping away at these pillars and giving incumbents a huge problem to think about. Take Uber for example: the entire argument for the company is that they can lower the cost of transportation by offering an on-demand service compared to the cost of owning a vehicle. It works as follows: if you purchase a car for $20,000 and have to pay $50,000 to maintain its ownership over a 10 year period with average distance traveled of 10,000 kms a year, your average cost of ownership per km is $0.7. If ride sharing companies can offer a service for lower than this price and achieve a high enough volume of vehicles, they can make consumers think twice about purchasing a car. This argument is made even stronger by autonomous driving since the highest input cost in ride sharing services is the labor cost.

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Even though Ford has made progress in devising a plan for this future, its communication of those plans hasn’t done enough to sway investors. The Detroit-based auto maker has invested in a number of software firms, announced 7 new electric vehicles and plans for 6 more, purchased a ride sharing shuttle service in San Francisco, and committed to a date for a fully autonomous fleet of vehicles. However, it hasn’t been able to build the perception that General Motors with its Maven smart mobility brand and investments in Lyft and Cruise automation has.

Additionally, the auto industry continues to face challenges to its profitability. The industry has always been a low revenue, low margin, high capital expenditure industry but these trends are becoming starker by the day. Previously, investments in auto stocks were predicated on the expectation of established players capturing growth in booming auto markets such as China and India. These expectations are now jeopardized by the ongoing economic and technological changes in the auto industry. Ford itself announced a plan to cut costs by $3 billion annually through the culling of 10% of its salaried work force by offering them voluntary packages. The U.S. auto maker is not the only company facing pressure on its bottom line.  Toyota, historically the most profitable auto company, just posted a decline in net profits and guided for a decline next year as well. However, getting spooked by these results and  changing the entire management and executive team will do nothing to fix the problem by itself. It can, in fact, make it even harder to deal with the challenges ahead. It is for this reason that we lowered our estimate for Ford’s stock price from $14.15 to $12.45.

ford valuation

The main reason for the lower valuations of the automotive divisions is the potential impact of ride sharing and autonomous driving on overall vehicle sales. Previous valuations for the divisions were derived based on the expectation of growth in the number of units sold in the long term. Absent that growth the most valuable division for Ford becomes its leases and loans division, as a car manufacturer will still have the ability to own and make money from its vehicle fleets, whether they own the transportation service or not.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Ford Motor

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