Is Ford Finally Ready to Take On Tesla?
Posted On July 28, 2022
Ford Motor Company (F 2.62%) just turned in great second-quarter results on Wednesday. There’s no denying that. The company appears primed and ready to take on electric vehicle (EV) trailblazer Tesla. It had almost $3 billion in operating cash flows that it will use to support its aggressive plans to ramp up EV production.
Investors liked what it had to say about its EV game plan, and cheered a substantial increase in its dividend. The inevitable comparison for any automaker going electric will be to see if it can match Tesla’s success. Investors want to know whether Ford is in position to do that soon. A closer look into that investing thesis may persuade them to wait.
The second-quarter headline numbers were great. Ford’s revenue soared 50% year over year to over $40 billion, and net income jumped 19%. But it takes more investigation to see if the stock belongs in the growth-oriented EV portion of a portfolio. Ford’s reported automotive revenue beat analyst estimates by more than $3 billion in the second quarter. It also more than tripled its cash flows from operating activities compared to the year-ago quarter.
The company will need that cash flow from its legacy business to achieve its EV investment goals. Ford expects that more than 50% of its global production will be EVs by 2030. After the earnings release, CEO Jim Farley said in a CNBC interview that the company is investing $50 billion in its growth business. And it plans to move aggressively, achieving an annual production run rate of 600,000 by the end of next year with the product mix shown below.
Image source: Ford Motor Company.
Many EV makers, including Tesla, are struggling with supply chain issues and securing the needed batteries. Ford says it has locked up battery capacity and raw materials for that projected run rate and for the majority of the volume for its future planned production run rate of 2 million vehicles by the end of 2026.
Taking on the leader
Tesla’s production already approached 1 million vehicles in 2022 and remains on track to increase that to approximately 1.4 million this year. Tesla expects its two new factories in Texas and Germany will help it increase that annual volume by about 50% per year for several more years. That’s a big lead from a company with proven capabilities and strong profitability.
This is where investors should take a step back and dig more into Ford’s EV plans. Tesla is distinctly more profitable than Ford, and it is likely that Ford’s EV business will be a further drag on its profitability for several years. The company won’t begin to break out its EV business metrics until next year, so any current estimates are speculation.
Looking under the hood
Ford improved its automotive operating margin in the second quarter to 8.8%, compared to 5.9% for the full year 2021. But that pales in comparison to what Tesla has achieved. Even with recent headwinds on costs from the supply chain factors and costs associated with ramping up the new factories, Tesla’s operating margin in the first quarter was 14.6% and has improved its profitability steadily in recent years.
F Operating Margin (TTM) data by YCharts
Farley noted in the CNBC interview the challenge as it relates to its new products stating, “We have to deliver profitability on our EVs.” And Ford’s numbers should be parsed appropriately when being compared to Tesla. While both include non-GAAP (adjusted) financial results to provide investors additional perspective, Ford excludes some costs that Tesla does not in those numbers.
Ford explains that its non-GAAP results leave out special items that include “dealer-related costs, and facility-related charges stemming from our efforts to match production capacity and cost structure to market demand and changing model mix.” As Tesla sells directly to consumers, it does not incur any dealer-related costs. And some might consider that costs associated with adjusting production and cost structure to match demand are the costs of doing business, rather than a special item.
Challenges remain for Ford stock
Ford will have to show it can pivot its business successfully for EV production. That has yet to be proven at scale. The results for 2023 will help show whether investors can expect success from that portion of its business. Even if Ford achieves its production goals, however, it has to address ongoing quality issues.
The electric Mustang Mach-E already experienced a significant recall involving nearly all vehicles built over its first two years of production. Issues with new products that use new technology can be expected, but Ford also has problems with its traditional combustion engine vehicles, including a recent investigation into its new Ford Bronco model by the National Highway Traffic Safety Administration as well as the company itself.
Indeed, Farley noted in his interview, “We’ve got to fix our quality.” Investors have plenty to watch going forward with Ford’s move into EVs. While the market reacted well to Ford’s most recent quarter, those looking at making it an investment in Ford stock based on its EV business may want to wait for more details to emerge before jumping in thinking it’s ready to take on Tesla.
Howard Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.