Investors have long overlooked the U.S. automotive industry because of its track record of poor returns. And with shares down around 29% over the last 10 years (not including dividends), Ford Motor Company (NYSE: F) is a quintessential specimen in this lackluster industry.
That said, an ambitious pivot to electric vehicles (EVs) could shake things up. Let’s explore the pros and cons of Ford to see if it could have millionaire-maker potential.
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Compared to most of its rivals, Ford quickly realized the importance of larger vehicles. In 2018, the company discontinued all its sedans to focus on more profitable trucks, SUVs, and crossovers.
This turned out to be the correct move. Not only are larger vehicles more profitable, but they also are better suited to evolving customer tastes. Other automakers like General Motors eventually followed Ford by cutting sedan models.
Ford also aggressively scaled back its failing international operations by leaving Brazil and India while reducing its footprint in Europe. The result has been a leaner company that can focus on its electrification strategy. Third-quarter earnings give insights into how the transition is playing out.
Revenue grew by a modest 5% year over year to $46 billion, representing Ford’s 10th consecutive quarter of top-line growth.
The company’s internal combustion engine (ICE) business has become a stable cash cow, with the Ford Pro segment (which focuses on commercial vehicles) generating $1.8 billion in earnings before interest and taxes (EBIT). The Ford Blue Oval segment generated an EBIT of $1.63 billion. However, while its legacy ICE business is booming, its EV transition has been challenging.
Instead of creating value, Ford’s new EV business (represented by the Model E segment) is dragging down company performance. In the third quarter, Model E sales fell 33% year over year to $1.2 billion with an EBIT loss of $1.22 billion.
Much of the weakness can be blamed on its flagship Mach-E crossover, which has experienced flagging sales and price cuts to deal with more competition in the market.
Over the coming years, Ford’s EV business will probably resume its longer-term growth as battery technology improves and consumers become more willing to embrace the new technology. But it is unclear how much shareholder value this will create.
For starters, most EV growth is expected to come from consumers switching away from ICE vehicles, so this trend will likely cannibalize Ford’s profitable legacy segments. Furthermore, industry competition is rising, with pure-play EV companies like Tesla, Rivian Automotive, and Lucid Group encroaching on Ford’s truck and SUV niche in the U.S.