Why Ford’s electric car division could be big in the future

Attendees view the Ford F-150 electric pickup truck at the Washington Auto Show in Washington, Tuesday, Jan. 25, 2022.

Bill Clark | CQ-Roll Call, Inc. | Getty Images

In a big plan I made for a long time, Ford Motor Company It decided to separate its electric car business from its traditional car business last week – but surprisingly, it has not separated from its electric car business following the stock valuations that have followed the electric car leader. Tesla And from time to time, followers quickly fell in love Rivian And open groupwhose share price has been negative recently.

company Wall Street meets in the middle On his restructuring plan, which is still important, analysts have been circling Positive for decision.

DataTrek co-founder Nick Colas, a former Wall Street auto trader who has said for some time that auto companies needed lobbying on the street that such a change shouldn’t happen sooner, called Ford’s move an “interesting restructuring.”

He says, “Car companies often do not mix their reporting/organizational charts significantly, and this step is always dangerous in terms of productivity. However, they allow clear management accountability and that is always a good thing in the long run. .

The message from Ford management is that the electric car business, despite strong sales of the Mustang Mach-E, is not ready for a good time. Ford chose the safest way to keep its promising startup business tied to its long-term profitable parentage. This allows the EV division, called Ford Model e, and other technology efforts, to invest up to $50 billion in cash flow from the existing Ford, called Ford Blue. That cash flow has reached $40 billion over the past two years, meaning the Model E won’t need to turn to bonds or the stock market to fund expansion.

At the same time, Ford could undo some of its big stock trade-offs compared to the pure EV game. The compromise Ford chose was to keep the business the same, but report different results starting next year so that Wall Street can begin to independently assess and evaluate the growth of the electric vehicle business.

will work For now, the answer is probably yes.

“We like the move, and we think it’s driven by confusion,” said Garrett Nelson, an analyst at CFRA Research. go away [price-to-earnings ratio] Trading in multiple single-digit shares, Tesla shares, [dropping this year] Although it is already the number two seller of electric vehicles and will grow even faster when the F-150 Lightning pickup truck ships in a few months.

Ford executives emphasized the operational and financial benefits that a remaining combined company would provide. Farley highlighted the joint venture’s ability to finance its growth strategy without access to capital markets, with the partner detailing in a press conference a plan to share costs between the gasoline and electric vehicle businesses, reduce costs for traditional units, and reach both sides of the business. equation. businesses work together to increase profits faster than they can do alone.

“If we go around, we risk that power,” Farley said. “That doesn’t make any sense. Leverage is the key, and we have the capital.”

At the heart of the plan is to cut up to $3 billion in annual costs by 2026, with key targets including Ford’s advertising budget – estimated at $1.8 billion in 2020 by Statista America alone – and $4 billion in costs certain. Galhotra said it will be addressed by increasing the quality of Ford vehicles.

Nelson said the company will look outside the United States for cost reductions as well, pointing to the loss of operations in Europe and parts of Asia.

The new growth could be fueled by the arrival of new electric vehicles, particularly the F-150 Electric, which Ford owns. It is reported that 250,000 pre-orders It is working to ramp up production early for delivery this year. Ford has accomplished this goal while still offering an electric version of its market-leading pickup truck in a single body style, unlike the separate cab with varying levels of luxury in the regular gasoline-powered F-150.

The company says they hope to get one One third of car sales will be electric by 2026 About 2 million vehicles. It sold about 726,000 F-150s in the United States last year.

But there is still reason to suspect that the real difference may come sooner.

All of this, in fact, could well position Ford to complete the remainder of the contract and take over the entire Ford E range by 2024, said Dan Ives, an analyst at Wedbush. Switch will continue to expand sales of the Mustang Mach electric. The -E, which has sold more than 27,000 units in 2021, is about half the number of gasoline-powered Mustangs, and a follow-up to the F-150’s earlier promise of electric jets and an all-electric commercial vehicle for small businesses. with other models being added as the company grows.

“In the next 12 to 18 months, given the success of the F-150, investors will want to see them raise their capital and double down,” Ives said. “When they start reporting unit sales, so you can see the demand in the electric vehicle business, we will be able to assess that. This is the first step in the electric vehicle branch of the business,” added Ives.

The fundamental problems facing Ford’s management extend beyond the auto industry. In the energy sector, where carbon-intensive businesses are threatened by renewable energy, incumbent players are under threat. Attacks by activists consider the consequences. Shell faces an ongoing campaign, and its CEO responds that investors fail to understand the importance of the current model of generating cash for renewable energy investments made in the future. And last year it was seen that way Peak time in corporate restructuring specialized companies, including GE and Johnson & Johnson.

. total breakdown.

“Today, there is still value in the conventional business of Ford’s electric vehicles and remaining connected vehicles, whether due to cash flow or other operational dependencies. However, at some point in the future (perhaps after electric vehicle technology electricity to continue further), the calculus will change.

Market history is full of examples where the value of separation eventually exceeds the value of integration and then divestment occurs.

“That pattern has repeated itself across industries and time periods, whether it’s companies with old and new technology businesses, companies with more mature companies, or companies with finished products and businesses,” Feldman said. “I suspect that a similar situation will occur with companies like Ford, GM in auto, Shell, and other energy companies that have a green versus brown business.”

Adam Jonas, an analyst at Morgan Stanley, said other automakers such as General Motors and Volkswagen will be watching to see if they can take similar steps. But Jonas, who does not recommend Ford shares, says that relying on the cash flow of existing businesses is too high a cost of capital to invest in the high-risk electric car business.

And according to Cola, comparisons between Ford and other automakers only go so far.

The Ford family, looking over the shoulder of the board of directors and aimed to preserve the “blue” Ford in all ways – he notes that their only partner that never went bankrupt – has a history of what he describes as “wise decisions about ” the next station. They wanted it to last for the next hundred years.”

“Ford has made a lot of good decisions lately, and this is one of them,” Ives said.

When will the official presentation of one electric car take place? It can be partially determined by the predetermined schedule of economic cycles and when recessions occur.

EV financing is currently dependent on the hot truck market in the US, and Ford can continue to maintain that demand for years, while the cash flow from conventional vehicles enables Ford to meet all of its goals. If a recession happens, says Cola, “they won’t be around it.” “Cars have a cyclical profit profile and that cash flow isn’t there, and you still have $5 billion a year in electric vehicle investments that you need to make. Where are you going to get if you’re selling less than four million cars?”

His view on the auto industry comes from his time as a banker: Auto companies tend to do the right thing when their backs are against the wall financially, in a weak economy. “Every other part of their cycle is reluctant. They want to maintain critical mass,” said Colas.

Ford’s EV upgrade doesn’t necessarily get Tesla ratings as most of the gains over the next eight years will still be in sales of the regular F150. But the current environment means Ford is better at switching to electric vehicles when it needs capital, providing a base from which equity capital can fall when another recession hits. “You make it optional and you don’t have to do anything,” says Cola. “There will always be a market for a Ford EV IPO,” he added.

The analysis of Ford’s cash flow and decisions shows a great strength that has been confirmed by Feldman’s research on the company’s strategy: the situation around small products and divestitures.

The attitude is like: ‘We know we have to break up eventually, but cash flow is so important right now/ Connections are too hard to relax right now/[insert other explanation here], then let’s get on with business.” He said, “Perhaps that reason now applies to Ford. But these ideas show how and why some companies can retain other businesses for long periods of time when divestitures are justified instead.