Introduction
My thesis is that Ford (NYSE:F) needs to figure out how to continue generating strong earnings before interest and taxes (“EBIT”) from the North American truck market regardless of how quickly buyers shift to battery electric vehicles (“BEVs”).
The Numbers
Trucks sold in North America are crucial to Ford’s bottom line! The 4Q22 slides show that America’s top-selling truck has been a Ford for 46 years in a row. The 2022 10-K shows that 1,051,900 or more than 50% of the total 2,012,345 2022 wholesale units in the US were trucks. We see in the December 2022 sales release that 101,649 of the 179,279 vehicles Ford sold in the US for the month were trucks:
Ford’s North American automotive EBIT was $7,377 million in 2021 which was 99.7% of the overall $7,397 automotive EBIT. In 2022 North America accounted for $9,176 million which was 94.7% of the overall $9,692 million.
The chicken tax levies a 25% duty on trucks imported to the US from outside North America and this is one of the reasons why Ford generates much of their EBIT from trucks sold in the US. The tariff has been in place since the 1960s and I’m guessing it won’t change anytime soon but long-term investors must recognize that it isn’t guaranteed to continue forever.
I think there are three big possibilities regarding the North America truck market for the coming years:
1. Buyers shift to electric trucks from Ford that are made profitably.
2. Buyers shift to electric trucks from Ford that are not made profitably.
3. Buyers are slow to shift to electric trucks.
Ford should be fine if we see scenario #1 or scenario #3 but they will struggle if we see scenario #2. I believe scenario #1 is the most likely because buyers are shifting to electric around the globe and Ford is working hard to increase efficiencies such that they’ll eventually be profitable in this area at high volume.
Fortunately for Ford, Tesla’s (TSLA) Cybertruck looks a bit odd to many old-school truck buyers. Ford recognizes that there are buyers out there who will shift to electric trucks like the F-150 Lightning if they aren’t too different from the ICE F-150s. A May 2022 CleanTechnica article reports that the Ford Lightning has a spare tire which is standard for trucks. However, an October 2022 Recharged article says it is unlikely that Tesla’s Cybertruck will have a spare. Ford is the #1 brand US consumers think of when considering an electric truck per Ford’s July 2022 EV presentation:
Per the Financial Times, Ford’s F-150 Lightning has plenty of room for growth:
Ford’s July 2022 EV presentation reveals that the F-150 Lightning is expected to have a production run rate of 150,000 vehicles per year by late 2023.
In the 4Q22 call, CEO Jim Farley gave examples of the ways in which their electric vehicles will be more efficient in the future. Profitability will go up over time as efficiency improves and volume increases:
We didn’t know that our wiring harness for Mach-E was 1.6 kilometers longer than it needed to be. We didn’t know it’s 70 pounds heavier and that that’s worth $300 a battery. We didn’t know that we under-invested in braking technology to save on the battery size. We didn’t know that we needed the world’s best aerodynamics to get the size of the battery smaller. And so now we have learned a lot and that second cycle of the product is in the factory right now being developed with a lot of new talent.
Automotive engineer Sandy Munro is known for making electric vehicles seem less nebulous when he tears them down and explains the architecture. He likes what he sees from Ford’s EVs! A June 2022 article from InsideEVs notes that he sees Ford as being ahead of other legacy automakers with respect to EVs:
According to Sandy Munro, based on what he’s learned from extensive tear-downs of multiple EVs, Ford may be the only legacy automaker to survive well into the future.
Valuation
The 2022 10-K shows that adjusted EBIT was $2.5 billion, $10 billion and $10.4 billion in 2020, 2021 and 2022, respectively on revenue of $127 billion, $136 billion and $158 billion, respectively:
The special items table breaks down the $12,172 million figure for 2022 which is a key part of the adjusted EBIT number::
Adjusted EBIT is expected to be between $9 and $11 billion for 2023. I think a fair valuation range for Ford is around 7 to 8x 2022 adjusted EBIT or $73 to $83 billion. We see 3,986,181,861 shares outstanding made up of 3,915,329,785 regular shares plus 70,852,076 B shares as of January 30, per the 2022 10-K. Multiplying by the February 7th share price of $13.45 gives us a market cap of $53.6 billion. The ROIC table in the 2022 10-K also shows $19.9 billion in debt excluding Ford Credit and $4.7 billion in net pension and OPEB liabilities.
My valuation range is close to the sum of the market cap, debt excluding Ford Credit, and retirement liabilities so I think the stock is reasonably valued.
Forward-looking investors should listen to what management has to say at the March 23rd teach-in at the New York Stock Exchange. In addition, investors should digest the strategic update that will be given at the Capital Markets Day in May.
Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.
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