Ford Motor Co. (F), founded in 1919 by Henry Ford, is one of the world’s most iconic companies and has been among its largest for decades. The company has remained a long-standing component of the S&P 500 Index, despite the index’s uncommonly high turnover rate. Ford was the only major U.S. automaker to emerge from the financial crisis without having dipped into the public well to stay viable.
- Ford is one of the oldest auto makers still in existence, with a global presence and a number of well-known brands and models.
- Ford makes a majority of its income from producing and selling cars to consumers.
- The company is interested in expanding its offerings to include electric vehicles and driverless cars.
- Ford also generates profit from its leasing and financing arms that provide consumers with car loans and lease agreements.
Ford's Current Outlook
Despite its impressive history, the past five years have been tough for Ford. During this period, the company’s stock has trended downward from $17.4 in August 2014 to a low of $7.4 in December 2018. Aside from global auto market uncertainty, this trend is attributable to various additional factors. in 2016, car-sales U.S. began falling as vehicles got more expensive. Ford has performed poorly in international markets including Europe, South America, and particularly in the Asia-Pacific. Finally, Ford has been slow to react to increasing demand for hybrids and electric vehicles.
More recently, a catastrophic fire at a Michigan-based magnesium plant disrupted Ford’s supply chain in May of last year. This forced the company to halt production of the Ford F-150, its best-selling car, for over a week. This disruption, coupled with reports of negligence at the plant, caused Ford’s stock price to fall over 35% by the end of the year. And sure enough, Ford's Q4 2018 earnings report reflected the hit. The automotive company reported a net income of a mere $0.1 billion that quarter, down from $2.4 billion in Q4 2017.
Despite a bump in Ford’s stock price in the first two quarters of 2019 from $7.4 to $10.25, Forbes projects the company’s revenue will shrink 1.1% in 2019. When it released its 10-K and annual report on January 23rd, Ford had a market capitalization of $32.77 billion, a current ratio of 122% and a return on equity (ROE) of 14.41%. Last year, Ford's Automotive sector shrank from 8.1 billion EBIT in 2017 to 5.4 billion in 2018.
The Business Model
According to its annual report, Ford saw a 2.23% bump in total revenues in 2018. However, the company's net income fell by 51% YoY and its adjusted EBIT fell by 27% YoY. These losses are largely attributable to a significant drop in sales volume. The auto manufacturer sold about 6.6 million vehicles in 2017 and only 5.9 million in 2018, the largest drop in sales since the financial crisis. Ford’s business is split up into three segments: “Automotive,” which is by far the largest, “Ford Credit” and “Mobility.” Ford’s Automotive segment earned $5.4 billion EBIT in 2018. Mobility lost $674 million EBIT in 2018 and Ford Credit earned $2.63 billion EBIT in 2018.
- Ford sold 5.9 million vehicles in 2018, down from 6.6 million in 2017.
- Last year, Ford’s net income fell 51% YoY.
- Forbes projects Ford’s revenue to shrink by 1.1% in 2019.
- Ford’s stock price has trended downward since 2014, from a high of $17.4 in August 2014 to a low of $7.4 in December 2018.
Ford makes the majority of its money by selling cars. It sells vehicles wholesale to dealers and distributors in the world's five major geographical segments: North America, South America, Europe, Middle East and Africa, and Asia-Pacific. Although Automotive revenue rose by about 2% in 2018, the segment's EBIT shrank by a third YoY, from $8.1 billion in 2017 to $5.4 billion in 2018 according to annual reports and 10-Ks. Ford also lost market share in all five geographical segments.
North America is bar far the company’s biggest market, where it maintains a 13.4% domestic market share. Ford’s relative success domestically is its biggest buffer against its poor performance in international markets. In 2018, Ford earned EBIT of $7.61 billion in North America, up slightly from about $7.26 billion over the same period last year.
Ford's international segments are more problematic. As an international company, Ford is at the mercy of the growing instability of the international monetary system. Inflation, tariffs, currency movements and unfavorable exchange rates have made Ford’s international dealings more difficult and are partly to blame for the company's performance shortfalls in recent years.
In 2018, Ford lost a whopping $1.8 billion EBIT in the Asia-Pacific YoY. 84% of this loss stemmed from the Chinese market. Ford’s losses in China are attributable to a confluence of factors, including a slowdown of China’s economy and increased prices resulting from the trade war between the U.S. and China, which has made it more expensive to import cars from the U.S to China and vice versa. The prices of some of the raw materials Ford imports from China, like steel an aluminum, have also risen because of increased tariffs. In the long run, however, it is important to keep in mind that growing prosperity in a nation with four times the population of the U.S. means growing demand for goods. Current headwinds notwithstanding, U.S. corporations like Ford still stand to benefit from this demand, particularly when it comes to expensive goods such as automobiles.
In Europe, Ford lost $765 million EBIT in 2018 and $971 million in 2017. In addition to the growing international instability, these losses, according to Ford, are largely due to the chilling effect of Brexit. In South America, Ford lost $678 million EBIT in 2018, slightly better than its $735 million a year ago. Ford's showed its greatest improvement in the Middle East and Africa segment, where it lost only $7 million EBIT, up from a $246 million loss in 2017.
The trade war between the U.S. and China has raised the cost of Ford's raw materials like steel and aluminum.
Ford Credit is a Ford subsidiary that offers a variety of automotive financing products to dealerships and individuals. These products allow dealerships to purchase new inventory and to increase their capacities, and allow dealerships to offer clients financing for purchasing and leasing automobiles without having to leave Ford’s business ecosystem. Ford Credit is available in the U.S., Canada and Europe.
Ford earned $2.63 billion EBIT with its Ford Credit segment in 2018, up from $2.31 billion in 2017. 2018 was the segment’s highest full year EBT in eight years. However, this upward trend may not last much longer as car sales continue to decline. Ford Credit’s ROE, which fell from 22% in 2017 to 14% in 2018, forecasts the segment’s coming decline.
Ford’s Mobility segment is essentially the company’s R&D division for self-driving cars and the software required for such cars. And since the company is not yet selling any of these cars, this segment doesn’t produce any revenue.
Ford increased its investment in this segment by $375 million in 2018.
This year, Ford has begun what it calls a “global redesign” to become more agile and less bureaucratic in the face of an auto industry destabilized by increasing competition, uncertainty and technological innovation. As Ford CEO Jim Hackett told investors in October, this redesign aims to slash $14 billion in costs by 2024.
The number of white-collar jobs Ford plans to slash in 2019.
Ford plans to cut roughly 10% of its salaried staff by August of this year, with its managerial staff taking the biggest hit. This move will eliminate 7,000 white-collar jobs and supposedly save the company $600 million a year. Ford touts these layoffs as part of its new, innovative strategy, but demurring analysts see them as a desperate cost-cutting measure.
In January, Ford announced it had earmarked 90% of its global capital allocation through 2023 for a company-wide shift to pickups, SUVs and commercial vehicles. This means that over the next four years Ford plans to phase out its sedans and other smaller cars. In recent years, Ford’s biggest vehicles have been its best sellers. In the U.S. Ford sells more F-150s than any other car, and in Europe it sells more Kuga SUV’s than any other car. Ford’s van sales are also strong in Europe. With these stats in mind, Ford’s shift to a portfolio of larger vehicles makes sense. The company is sticking to its biggest guns.
Ford F-150s sold in North America in 2018.
As evidenced by Ford’s Mobility business segment, the company is increasing its investment in self-driving cars. This is certainly a forward-looking initiative on Ford’s part, but a breakthrough autonomous vehicles will not, in all likelihood, come soon enough to be the boon Ford needs.
Hybrids and Electric Vehicles
In January of 2018, it announced plans to invest $11 billion in electric vehicles, much higher than its previous target of $4.5 billion. With this investment, the company plans to roll out 40 electronic vehicles by 2022. 16 of these will be fully electric and the rest will be plug-in hybrids.
In April, Ford invested $500 million in Rivian, a Michigan-based electric vehicle start-up that sport two models, a five-passenger pickup and a seven-passenger SUV, with 400-mile ranges. As part of the deal, Ford will build an electric vehicle using Rivian's technology. This investment came two months after Rivian secured a $700 million investment from Amazon (AMZN).
A Destabilized Auto Industry
As outlined above, many of Ford’s challenges are macroeconomic in nature and affect the auto industry as a whole. For at least the last five years, central banks in many developed markets have tightened their monetary policies as governments deficits remain high. The U.S. Federal Reserve, for example, has raised its interest rates nine times since 2015, four times in 2018 alone. This tightening has increased volatility in developing nations, as exemplified by recent currency devaluations in countries like Turkey and Argentina. Such volatility has negatively impacted the global financial flows of companies like Ford. Recent rises in the prices of commodities like steel and aluminum have also raised costs for Ford, and the perpetually volatile price of oil further heightens uncertainty for Ford’s business.
In recent years, demand for cars has also fallen short of projections in key markets like North America and Europe and particularly in China. As Ford outlines in its annual report, these excesses have increased costs for auto manufacturers who have ramped up their capacities to meet perceived future growth. In China, for example, the auto industry witnessed excess capacity at 78% in 2018. Ford predicts to see an excess capacity of 47 million units, on average, until 2024.
Excess capacity leaves auto manufacturers with fixed costs and no way to cover them.
Auto manufacturers’ scramble to capitalize on the massive Chinese market has led to a spike in competition in the industry. This, coupled with falling demand and the rise of Chinese companies like Chery Automobile Co. and BYD Auto Co., has increased pressure on companies like Ford to keep prices high.
The rising demand for hybrids and electric vehicles, spurred by the rise of companies like BYD and Tesla (TSLA), has also increased competition and put pressure on established auto manufacturers to make their cars more efficient and technologically advanced.
The amount Volkswagen has pledged to invest in electric vehicles.
Late to the EV Game
While Ford’s 2019 announcement to invest $11 billion in electric vehicles is promising, the company may be left behind by competitors on this front. Toyota Motors (TM) announced in June that it was accelerating its plans to roll out nine new electric vehicles. It previously planned to release these models beginning in 2025, and now plans to start next year. In February, Volkswagen AG (VLKPF) announced bold plans to invest a total of €80 billion ($91 billion) in electric vehicles, including €30 billion ($33.5 billion) over the next five years. The German company says it wants to put 50 new electric vehicles on the road by 2025. It is unclear whether Ford’s relatively modest strategy or Volkswagen’s bold strategy will win out. But if the likes of Volkswagen and Toyota are right about the coming demand for electric vehicles, Ford will be left in the dust.