This historic carmaker will rev up your portfolio

The company’s plans to go electric have been pared back after electric vehicles (EV) sales growth slowed in the second half of 2023 and analysts warned of saturation in the market.

“In the US, an abundance of crossovers and premium priced [battery electric vehicles] has saturated early adopters, who tend to be more affluent and use home charging,” says RBC Capital Markets analyst Tom Narayan.

However, as well as petrol- and diesel-powered trucks and 4x4s, hybrid sales will now be crucial to Ford’s strategy, in addition to pricey subscriptions and fancy software sold to commercial buyers.

Old faithful

Electric vehicles still represent a relatively small part of Ford’s portfolio. Last year, EV sales revenues reached $5.9bn (£4.7bn) compared to $102bn generated by the ‘Blue’ division – which includes hybrids and petrol and diesel cars – and $58mn from Ford Pro, which provides commercial vehicles and fleet management software, vehicle maintenance, and financing services.

Blue grew revenue by 8 per cent in2023 and managed to increase its operating margin slightly to 7.3 per cent. Meanwhile, in a display of strength,‘Pro’ increased its revenue by 19 per cent and boosted its margin from 6.6 per cent to 12.4 per cent.

The automaker will keep selling wildly popular F-series trucks and other large petrol- and diesel-powered vehicles for years to come. The F-series trucks were the top-selling vehicles by far in the US last year, delivering a whopping 209,000 cars more than the country’s second favourite, the Chevrolet Silverado.

The F-series, which has topped the sales charts for almost 50 years, ranges from a $38,000 F-150 to big, well-appointed models worth over $100,000.

These vehicles have surged in price since Covid-19, as has Ford’s take from them. The gross profit per unit has gone from $2,000 in 2019 to $4,500 more recently. It went as high as $6,000 in the post-pandemic spending rush, but the current margins are still sizeable.

North America (Canadians have similar buying habits to those across the border) provides about three-quarters of Ford’s revenue. The UK is 5 per cent, $9bn in the previous financial year.

Chief executive Jim Farley has argued this year the company is riding the US infrastructure megatrend given builders and engineers have to get to the worksites somehow.

“We are dominant in vocations like service construction, utility and … government,” said Farley. “But our biggest success is [among] small- and medium-sized businesses and tradespeople. That’s the backbone of the US economy, and boy, does Ford have a reputation with those customers.”

Hybrids will also be crucial to future growth. “Across gas [petrol and diesel] and hybrid vehicles, an increasing preference for hybrid trucks and SUVs helped deliver Ford the best-ever quarterly hybrid sales record,” the company said last week.

The outlook for 2024 overall is positive as well, with hybrid sales expected to rise by 40 per cent.

EV uncertainty

Ford’s dominant position in established markets provides some protection against the uncertain world of EVs.

The company still offers plenty of EV exposure – Ford says it sells the country’s second most popular SUV-type EV in the country in the form of the Mustang Mach-E, which goes for around £45,000 in the UK. It also has a F-150 Lightning truck to offer customers.

RBC’s Narayan argues there is still opportunity here, despite the scepticism over previous EV demand forecasts. “Mainstream buyers in the US, demanding larger form factors like SUVs and pick-ups, are not seeing much model availability.”

The wider market is tricky, however. The European carmakers and Tesla (US:TSLA) have given up lots of ground to Chinese competitors, whose models are far cheaper. There is regulatory pushback emerging from the US and EU, but some analysts have indicated it would be smarter to just let companies like BYD (HK:1211) dominate the cheap end of the market and focus on pricier models.

But Ford wants to join that battle. “We don’t believe the game is going to be really fought and won with larger vehicles,” said chief finance officer John Lawler last month. “We think it’s going to be in the smaller, more affordable vehicles.”

It has not been an easy ride so far, though. The EV division reported an operating loss of $4.7bn in 2023 and this is expected to widen to $5bn-$5.5bn next year, which HSBC described as “concerning”.

Management has marked this down as lessons learned, however. “We’re developing next-generation EVs that are going to surprise customers and be profitable within a year of launch,” said Lawler.

Bank of America analysts John Murphy and Douglas Karson are positive on this shift, saying Ford “should achieve a real inflection point in earnings for the Model E business to come when it ultimately brings that volume online”. The strategy will be to sell larger commercial EVs and smaller consumer cars.

So far, however, competitors have been able to scale up output and lose far less cash in doing so. Given its sales and profits are spread across several brands, General Motors (US:GM) does not provide a completely clean comparison, but it is pushing hard to release new large EV models, including an electric Cadillac Escalade, while production of the Hummer EV is increasing.

Road ahead

North America appears like the perfect market for EVs – largely due to the far wider availability of off-street parking – but range anxiety (the fear that charging points would not be within easy reach if needed) has continued to stop people buying.

Analysts at Jefferies argue this will eventually disappear. “We have long argued that public charging fears, especially in the US, are largely psychological,” they say, claiming charging points are “essentially at the same density as the 530 petrol pumps [for every] ICE vehicle on the road.”

Some owners would likely challenge those calculations based on the number of charging spots out of action, the slow turnover between users, and in Europe a lack of off-street parking even in smaller towns.

In any case, that ‘psychological’ block does point to continued demand in what have been the top-selling cars in the US for years and years. Consumers do want cars that are cheaper to run, however, and hybrids are dragging in a significant proportion of buyers.

A recent relaxation of a US Environmental Protection Agency target for two-thirds of vehicle sales to be electric models by 2032 could further help Ford’s Blue division. The new rule says EVs must represent 35 per cent to 56 per cent of sales, and plug-in hybrids 13 per cent to 36 per cent.

Ford is pricier than peers such as General Motors and Stellantis (IT:STLAM) from a price/earnings perspective. However, after taking a few hits in the past two years Ford is poised to hit the accelerator in the second half of the decade.

And even with prices expected to come down for both GM and Ford this year, the latter is guiding for a recording operating profit of $10bn-$12bn.