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Should You Buy Ford (F) Now on Its Ambitious Overhaul Plans?
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Lately, there has been a lot of speculation about Ford (F - Free Report) looking to split its electric vehicle (EV) business as a standalone entity. Yesterday, the U.S. auto giant officially announced the decision to reorganize its auto operations into two separate divisions— one focused solely on EVs and another on its internal combustion engine (ICE) business. Investors cheered this major restructuring move aimed at going all-in on EVs, with shares of Ford jumping around 8.4% yesterday to close at $18.10.
All You Need to Know About Ford’s Bold Rejig
In one of the boldest steps under the leadership of CEO Jim Farley, Ford is separating its EV business from its legacy ICE business to boost its position in the e-mobility domain. It should be noted that Ford is not spinning off its EV business into a separate public company. It’s just splitting the EV business into a separate unit within the company.
Per the reorganization, Ford will have two distinct businesses, namely Ford Model e and Ford Blue. Ford Model e will focus on EVs, advanced technologies and several related aspects to support the electrification plans. The unit will be engaged in the development of EV platforms, software platforms, batteries, inverters, e-motors, charging capabilities et al. to scale up the production of electric-powered vehicles. Farley would double up as president of the Ford Model e unit.
Meanwhile, Ford Blue will focus on the firm’s legacy gas-powered business, which forms the bulk of the automaker’s business currently. The unit will include Ford’s iconic models including F-Series, Bronco and Explorer SUVs, Ranger and Maverick trucks, and Mustang. The Ford Blue division will be led by Kumar Galhotra, who is currently serving as Ford’s president of the Americas and international markets.
With the Model E division, Ford is targeting annual production of 2 million EVs by 2026, thereby accounting for around 33% of the company’s total volumes. By 2030, Ford expects 50% of its global volumes to come from electric sales— higher than its previous target of 40%. The company intends to spend $5 billion on EVs this year, which calls for a two-fold increase from the 2021 levels. Ford targets to spend $50 billion on EVs through 2026, up from the previously announced $30 billion through 2025.
While Ford Blue’s emphasis is to boost profitability, the Model e unit will currently strive for innovation, breakthrough technologies and rapid growth, with less focus on profits at the beginning.
Analyzing the Move
Keeping both operations in-house rather than spinning off its EV division wasn’t fully appreciated by some market experts and analysts who believe that a spin-off could have actually helped Ford capture valuations that investors are awarding to EV giants like Tesla (TSLA - Free Report) and even auto startups that don’t have the baggage of legacy business and are solely focused on EVs.
Some industry watchers are of the view that by keeping both divisions in-house, Ford is intertwining their fates. Basically, they mean to say that Ford Model E will be fully dependent on the profits generated by Ford Blue. They think that the move comes with potential risks.
Quoting the executive director of insights at Edmunds, Jessica Caldwell, “Some might view the internal combustion engine line of business as a less exciting dinosaur of the past compared to the more compelling EV products of the future.”
Mike Ramsey, research director at Gartner, expressed concerns that this rejig may create an internal imbalance in the company. He said “It does get a little fraught when so much of the R&D money is flowing towards a relatively small business. It has the potential of separating the company into the good side and the bad side.”
Nonetheless, we believe that the company’s decision to split its two units and retain the ownership of both will result in closer cooperation and provide synergies that would help Ford compete better with legacy automakers who are revving up their EV game, established EV names like Tesla as well as up and coming EV startups. It will give the employees of both units more clearly defined goals. Also, the company won’t need additional capital from the market to fund its EV operations.
Notably, the automaker plans to provide discrete financial results for Ford Model e, Ford Blue as well as its Ford Pro business (which is a separate unit focused on building commercial fleet vehicles) by 2023. This would give investors better insight into the operations and also accelerate Ford’s goal toward the right direction.
Ford would be focusing extensively on operational efficiency and profitability growth from its Ford Blue business, which is needed for the massive EV push. By 2025, Ford aims to trim costs for its ICE models by $3 billion. The ICE business which is the “cash and the profit engine” of the firm will support the massive capex plans of the Ford Model e division, thereby helping the latter to ramp up production and achieve economies of scale.
While Ford Model e and Ford Blue will be run as separate businesses, they would support each other and share relevant technology and practices to leverage scale and drive operating improvements. In fact, the leverage and interconnectivity between the two units was a major reason Farley chose not to spin off the operations. Farley said the new EV business will “produce as much excitement as any pure EV competitor, but with scale and resources that no start-up could ever match.”
He believes that the spin-off would rather hinder the two groups from cooperating effectively. “They would come to see each other as competitors, and the cooperation would stop,” he said. That way, the move seems rational.
While a spin-off could have unlocked more value for Ford as investors drive up the valuations of pure-play EV companies, it would have done little to step up the automaker’s EV ambitions.
But could the latest announcement be a precursor to spinoff? We don’t think that’s happening anytime soon. That’s because the company needs profits from its ICE business to fund its EV unit. If Ford were to spin-off now and make a separate independent business solely of EVs, it would be an uphill battle considering the massive development and manufacture costs. But over the years, it’s quite possible for the company to spin off its EV unit to unlock more value.
Not a “Buy” Now
Creating distinct albeit complementary businesses will indeed provide Ford unbridled innovation in Ford Model e combined with Ford Blue's industrial know-how and high-profile models. The company has also increased its long-range targets and expects to hit an adjusted EBIT margin of 10% by 2026. Also, it anticipates its EV business to become profitable within 2026. But that’s still four years away.
Also, as for its plans to better compete with established players like Tesla, there’s much catching up to do. Last year, Ford had just one electric offering, the Mustang Mach-E SUV, and it sold around 27,000 units of the same. And then there is Tesla, which dominates the EV market by a huge margin, having sold around 352,500 vehicles in the United States (This is an estimate by research firm Motor Intelligence as the EV behemoth doesn’t provide a regional breakdown of deliveries).
No doubt, the Ford+ plan, with a deep focus on increasing profitability, exploring e-mobility future and enhancing customer experience augurs well for the long term. Mustang Mach-E is already the second best-selling electric SUV in the United States, and is also profitable. The shipment of E-Transit vans has begun and the much-awaited F-150 Electric is expected to hit the market soon, and is set to drive the top line. We are also optimistic about the company’s investment in battery plants.
While Ford is hitting the right notes to make the most out of the electrified future, it might still be too early to buy the stock solely based on its latest announcement. Ford does face near-term hurdles just like its peers because of the supply-chain snarls. It expects first-quarter 2022 wholesale volumes to witness high single to low double-digit declines due to supply shortages related to Omicron shutdown and semiconductor crunch. Low vehicle production amid parts shortage and manufacturing constraints will induce lost revenues, especially in the first half of 2022. In view of such near-term headwinds, you could wait for a better entry point to grab this stock.
Having said that, the long-term prospects of Ford are quite promising. And if you own the stock of this iconic automaker, stay invested to enjoy handsome returns over the coming years. The stock currently carries a Zacks Rank #3 (Hold) and has a long-term expected EPS growth rate of 25.2%.
Image: Bigstock
Should You Buy Ford (F) Now on Its Ambitious Overhaul Plans?
Lately, there has been a lot of speculation about Ford (F - Free Report) looking to split its electric vehicle (EV) business as a standalone entity. Yesterday, the U.S. auto giant officially announced the decision to reorganize its auto operations into two separate divisions— one focused solely on EVs and another on its internal combustion engine (ICE) business. Investors cheered this major restructuring move aimed at going all-in on EVs, with shares of Ford jumping around 8.4% yesterday to close at $18.10.
All You Need to Know About Ford’s Bold Rejig
In one of the boldest steps under the leadership of CEO Jim Farley, Ford is separating its EV business from its legacy ICE business to boost its position in the e-mobility domain. It should be noted that Ford is not spinning off its EV business into a separate public company. It’s just splitting the EV business into a separate unit within the company.
Per the reorganization, Ford will have two distinct businesses, namely Ford Model e and Ford Blue. Ford Model e will focus on EVs, advanced technologies and several related aspects to support the electrification plans. The unit will be engaged in the development of EV platforms, software platforms, batteries, inverters, e-motors, charging capabilities et al. to scale up the production of electric-powered vehicles. Farley would double up as president of the Ford Model e unit.
Meanwhile, Ford Blue will focus on the firm’s legacy gas-powered business, which forms the bulk of the automaker’s business currently. The unit will include Ford’s iconic models including F-Series, Bronco and Explorer SUVs, Ranger and Maverick trucks, and Mustang. The Ford Blue division will be led by Kumar Galhotra, who is currently serving as Ford’s president of the Americas and international markets.
With the Model E division, Ford is targeting annual production of 2 million EVs by 2026, thereby accounting for around 33% of the company’s total volumes. By 2030, Ford expects 50% of its global volumes to come from electric sales— higher than its previous target of 40%. The company intends to spend $5 billion on EVs this year, which calls for a two-fold increase from the 2021 levels. Ford targets to spend $50 billion on EVs through 2026, up from the previously announced $30 billion through 2025.
While Ford Blue’s emphasis is to boost profitability, the Model e unit will currently strive for innovation, breakthrough technologies and rapid growth, with less focus on profits at the beginning.
Analyzing the Move
Keeping both operations in-house rather than spinning off its EV division wasn’t fully appreciated by some market experts and analysts who believe that a spin-off could have actually helped Ford capture valuations that investors are awarding to EV giants like Tesla (TSLA - Free Report) and even auto startups that don’t have the baggage of legacy business and are solely focused on EVs.
Some industry watchers are of the view that by keeping both divisions in-house, Ford is intertwining their fates. Basically, they mean to say that Ford Model E will be fully dependent on the profits generated by Ford Blue. They think that the move comes with potential risks.
Quoting the executive director of insights at Edmunds, Jessica Caldwell, “Some might view the internal combustion engine line of business as a less exciting dinosaur of the past compared to the more compelling EV products of the future.”
Mike Ramsey, research director at Gartner, expressed concerns that this rejig may create an internal imbalance in the company. He said “It does get a little fraught when so much of the R&D money is flowing towards a relatively small business. It has the potential of separating the company into the good side and the bad side.”
Nonetheless, we believe that the company’s decision to split its two units and retain the ownership of both will result in closer cooperation and provide synergies that would help Ford compete better with legacy automakers who are revving up their EV game, established EV names like Tesla as well as up and coming EV startups. It will give the employees of both units more clearly defined goals. Also, the company won’t need additional capital from the market to fund its EV operations.
Notably, the automaker plans to provide discrete financial results for Ford Model e, Ford Blue as well as its Ford Pro business (which is a separate unit focused on building commercial fleet vehicles) by 2023. This would give investors better insight into the operations and also accelerate Ford’s goal toward the right direction.
Ford would be focusing extensively on operational efficiency and profitability growth from its Ford Blue business, which is needed for the massive EV push. By 2025, Ford aims to trim costs for its ICE models by $3 billion. The ICE business which is the “cash and the profit engine” of the firm will support the massive capex plans of the Ford Model e division, thereby helping the latter to ramp up production and achieve economies of scale.
While Ford Model e and Ford Blue will be run as separate businesses, they would support each other and share relevant technology and practices to leverage scale and drive operating improvements. In fact, the leverage and interconnectivity between the two units was a major reason Farley chose not to spin off the operations. Farley said the new EV business will “produce as much excitement as any pure EV competitor, but with scale and resources that no start-up could ever match.”
He believes that the spin-off would rather hinder the two groups from cooperating effectively. “They would come to see each other as competitors, and the cooperation would stop,” he said. That way, the move seems rational.
While a spin-off could have unlocked more value for Ford as investors drive up the valuations of pure-play EV companies, it would have done little to step up the automaker’s EV ambitions.
But could the latest announcement be a precursor to spinoff? We don’t think that’s happening anytime soon. That’s because the company needs profits from its ICE business to fund its EV unit. If Ford were to spin-off now and make a separate independent business solely of EVs, it would be an uphill battle considering the massive development and manufacture costs. But over the years, it’s quite possible for the company to spin off its EV unit to unlock more value.
Not a “Buy” Now
Creating distinct albeit complementary businesses will indeed provide Ford unbridled innovation in Ford Model e combined with Ford Blue's industrial know-how and high-profile models. The company has also increased its long-range targets and expects to hit an adjusted EBIT margin of 10% by 2026. Also, it anticipates its EV business to become profitable within 2026. But that’s still four years away.
Also, as for its plans to better compete with established players like Tesla, there’s much catching up to do. Last year, Ford had just one electric offering, the Mustang Mach-E SUV, and it sold around 27,000 units of the same. And then there is Tesla, which dominates the EV market by a huge margin, having sold around 352,500 vehicles in the United States (This is an estimate by research firm Motor Intelligence as the EV behemoth doesn’t provide a regional breakdown of deliveries).
No doubt, the Ford+ plan, with a deep focus on increasing profitability, exploring e-mobility future and enhancing customer experience augurs well for the long term. Mustang Mach-E is already the second best-selling electric SUV in the United States, and is also profitable. The shipment of E-Transit vans has begun and the much-awaited F-150 Electric is expected to hit the market soon, and is set to drive the top line. We are also optimistic about the company’s investment in battery plants.
While Ford is hitting the right notes to make the most out of the electrified future, it might still be too early to buy the stock solely based on its latest announcement. Ford does face near-term hurdles just like its peers because of the supply-chain snarls. It expects first-quarter 2022 wholesale volumes to witness high single to low double-digit declines due to supply shortages related to Omicron shutdown and semiconductor crunch. Low vehicle production amid parts shortage and manufacturing constraints will induce lost revenues, especially in the first half of 2022. In view of such near-term headwinds, you could wait for a better entry point to grab this stock.
Having said that, the long-term prospects of Ford are quite promising. And if you own the stock of this iconic automaker, stay invested to enjoy handsome returns over the coming years. The stock currently carries a Zacks Rank #3 (Hold) and has a long-term expected EPS growth rate of 25.2%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.