Ford Stock: Why It Has Dropped This Year And Its Future Outlook

After a tough 6 months Ford (NYSE:F) is coming back. I’ve indicated previously my interest in Ford, which starts with the clear vision and plans for the ICE (Internal Combustion Engine) to BEV (Battery Electric Vehicle) transition that CEO Jim Farley brings. The fact that Ford’s share price has fallen from $25 at the start of the year to now sit at $12.73 is hard to follow, although it seems to reflect general anxiety about the automotive industry and the ICE to BEV transition. Recent sentiment (last 30 days) from Seeking Alpha authors is very bullish with 13 buys (2 strong buy, 11 buy), 5 holds and just 2 sells (1 strong sell, 1 sell). Wall Street ratings are more on the fence with 11 out of 22 rating “hold”, but still the “buy” sentiment (3 buy, 5 strong buy) exceeds the “sell” (2 sell, 1 strong sell). Here I give my take on why the Ford share price has lagged recently but why I think that the outlook is positive.

The past 6 months

Ford’s share price has fallen by 41% in the past 6 months as short term issues with supply chain (mostly chip shortages) have bitten hard. There have also been teething problems with the BEV Mustang Mach-E battery which requires an over-the-air software fix for 48,924 vehicles and delivery delay for new vehicles.

Getting ready to transition

CEO Jim Farley has been clear that managing the exit from ICE manufacture is a big challenge. Part of the reason for recently separating the ICE and BEV segments of Ford’s business is because the different aspects of the business have different challenges and roles. The BEV business is about innovation and building from scratch a new vehicle architecture. There is heavy focus on a small number of iconic models in the first instance. The ICE business is a short/medium term cash cow that will be focused on maximizing cash even as the business gets progressively dismantled. Today Bloomberg foreshadowed as many as 8,000 (largely from 31,000 US employees) salaried job cuts in the Ford Blue (‘ICE’) division. Bloomberg reports that things are evolving and that this will be a major step towards cutting $3 billion of costs by 2026. Notwithstanding the job cuts, the plan is for Ford Blue to be the cash cow that underpins the Model-e, BEV division.

The job cuts are in part management addressing the 41% fall in share price over the past 6 months. The share price fall by Ford is greater than the overall automotive market fall and Ford acknowledges that it has too many employees.

F-150 Lightning

There is little doubt that the F-150 Lightning is the BEV model that Ford seeks to make its mark on the BEV market. The F-150 Lightning comes with AWD and 2 electric motors. There are two battery options being 131 kWh (320 mile range) or 98 kWh (230 mile range). The F-150 Lightning will run your house for up to 3 days. The bigger battery version has a 10,000 lb towing capacity. While there is some competition with the GMC (GM) Hummer EV and Rivian (RIVN) releases, in general they occupy a different (more expensive) price point. It is fortunate for Ford that the release of Tesla’s (TSLA) Cybertruck is delayed by Tesla’s focus on expanding its manufacturing base, scaling up battery production and driving its scale up of current Model 3 and Y.

The bigger picture, including battery manufacture

Ford plans to spend $50 billion in establishing its BEV business and build 2 million BEVs annually by 2026. This is a pretty big mountain to climb since Ford’s BEV sales in 2021 were just 27,140. However initial sales of the F-150 Lightning are showing double digit sales increase, with plans for 200,000 annually. If the F-150 Lightning is as popular as CEO Jim Farley predicts, 200,000 sales/annum will be just the start.

Another crucial development is Ford’s JV, BlueOval SK LLC, with South Korean battery company SK On Co, which has been finalized to build batteries in the US with a goal of at least 60 GWh of battery capacity annually. This is part of the JV plans to produce 129 GWh manufacturing capacity in the US, with mass manufacture commencing in 2025. This is a key element in building their Model-e BEV business. Ford and SK On Co also have global plans with a battery manufacture in Turkey involving 30-45 GWh primarily for commercial vehicles.

Conclusion

The stock market never rests and, like the tide, fortunes wax and wane even for the best companies. We are in the early stages of a one in a hundred year transition as wheeled transport gets electrified. This means a lot of uncertainty. It is clear that not all (or even most?) ICE manufacturers are going to successfully complete the transition to BEV manufacture. It is a big shift and there are a host of emerging companies with no baggage of ICE manufacture to transition from. Tesla is clearly a dominant player and it will almost certainly stay that way, although there is plenty of room for other manufacturers. A lot of Chinese BEV manufacturers are emerging, while other ICE manufacturers are making the transition. BYD (OTCPK:BYDDF) looks like it will emerge as a big winner in the BEV transition. In Europe Volkswagen (OTCPK:VWAGY) is emerging as the company with most skin in the game in the BEV transition. In the US, after a period of denial both GM and Ford now have clearly defined their futures as becoming fully electrified. Both have CEOs with a clear commitment to the transition. My take is that Ford’s Jim Farley has a more comprehensive plan for Ford as he has articulated both a major BEV initiative as well as the beginnings of a plan to exit the ICE business (while maximizing cash generation as the end of the ICE approaches).

Jim Farley sees the F-150 Lightning as a defining BEV and he makes a big claim that this model is going to be as important for not only Ford, but also the car industry, as was its Model T in the early days of motoring. Ford demands the attention of automotive industry investors for a good reason. The share price is moving (up 10% over the past 5 days) so pay attention. A share price above $20 seems achievable soon.

I am not a financial advisor, but I follow closely the big changes as the transport sector starts to electrify. I hope that my comments about Ford are helpful to you and your financial advisor as you consider possible investment in the transport sector.