Ford's on the Right Road

Ford F used its long-awaited investor day to introduce its Ford+ plan. We like what we heard around the automaker's aggressive move toward battery electric vehicles, including that 40% of global volume will be all electric by 2030 and BEV spending will increase by about $8 billion to more than $30 billion for 2016-25. For years, Ford has talked about a total company adjusted EBIT margin of 8%, and it now feels confident in saying that will occur in 2023. This margin assumes 10% in North America and 6% in Europe. We’ve raised our fair value estimate to $17 per share from $15 to factor in higher EBIT margins for 2023-25 as well as a slightly higher assumed return on new invested capital as Ford seeks to increase its connected service offerings over time.

Ford did not reveal all its plans; it will have more commentary on its autonomous vehicle efforts later this year and it mentioned new vehicles yet to be disclosed. With regard to the dividend coming back, management said only that there are shareholders who want its return, so we continue to expect an announcement later this year. We are confident that Ford is on the right path and has made meaningful restructuring actions in Europe and South America while enhancing its product lineup globally to focus on light-truck models, so we have lowered our fair value uncertainty rating to high from very high.

The Ford+ plan’s emphasis is on electric vehicles, commercial vehicles, and services via a stand-alone business, Ford Pro, and connected services such as mobile service and charging via the FordPass and third-party charging partners. We like the moves that Ford has made recently toward these goals, such as creating the Ford Ion Park battery development center and investing in Solid Power to help bring solid-state batteries to market. Ford expects solid state this decade. Through its battery joint venture with SK Innovation, Ford believes it can bring pack costs to $100 per kilowatt hour by 2025 and $80 well before the end of this decade.

We like that Ford is now seeking more vertical integration, as this should enable the best possible vehicle designs and integration of electrical parts. The recently unveiled F-150 Lightning BEV pickup truck already had 70,000 reservations in a week, and we continue to see the Mustang Mach-E as a valid competitor to Tesla’s TSLA Model Y. We no longer think that Ford trails the competition in BEVs, as the Mach-E and Lightning have enabled it to catch up quickly; we think it just needs more offerings like General Motors GM has talked about with its plan of 30 BEV launches by 2025. Ford’s manufacture of a BEV full-size pickup shows how serious the company is about BEVs, as this segment is the lifeblood of the company at about 1 million units a year. CEO Jim Farley stressed that Ford will not give up its leadership in trucks as it moves to BEVs.

As for other possible new products, two new BEV platforms--one for full-size pickup trucks and a rear-wheel/all-wheel drive one for SUVs--are coming. To us, making a BEV Bronco to target wealthy outdoor enthusiasts makes a lot of sense, so we expect that announcement at some future date. We don’t see why consumers should only have the Tesla Cybertruck or an offering from a startup such as Rivian (in which Ford owns a stake and has a board seat) to choose from in the off-road BEV market. Ford has the volume and therefore the scale those companies can only aspire to for now, and it did not shy away from saying that by July 2022, it will have more over-the-air update-capable vehicles on the road than Tesla. Ford sees its OTA-capable vehicle number at 1 million this year and 33 million by 2028.

Ford now needs to execute on this plan, which will be a multiyear process, but major opportunities for new revenue and cost reductions exist. On the cost side, management sees a change to cut warranty costs alone by $1 billion-$2 billion over 2021-24 by using connectivity to be more proactive in catching issues. With 70% of the Mach-E’s customers new to Ford, we think that shows the company can be competitive in BEVs, and we are not worried about its future as the industry continues to electrify. Ford announced in February that by 2030, Ford Europe will be 100% BEV for passenger vehicles and two thirds BEV or plug-in hybrid for commercial vehicles. The company has plenty of liquidity to fund this transition, with March 31 automotive cash and securities at $31.3 billion plus another nearly $16 billion available on credit lines. Management said that about 70% of the capital invested in equipment for current lithium-ion manufacturing can be kept for solid-state battery manufacturing, so we don’t see a constant cycle of investing and then impairing fixed assets as a normal course of events.