May 27, 2022

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Why Ford’s big electric car division might get even bigger in the future

Why Ford's big electric car division might get even bigger in the future

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

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

In the biggest deal I’ve made in a long time, Ford Motor Company It decided to separate its electric car business from its traditional auto business last week — but remarkably, it hasn’t split from the electric car business in pursuit of hot stock valuations that have followed the electric car leader Tesla And intermittently, followers quickly like Rivian And the Lucid Groupwhose stock prices have suffered recently.

company Wall Street met halfway In its restructuring plan, which is still important, analysts have been roundabout Positive for the decision.

DataTrek co-founder Nick Colas, a former Wall Street auto banker who has been saying for a while that auto companies will need to convince the street that such spin-offs shouldn’t be done sooner rather than later, called Ford’s move an “interesting reorganization.”

He said, “Auto companies don’t often mix up their organizational reporting/charts in a dramatic way, and these moves are always risky in terms of productivity. However, they allow for clearer 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 well-acclaimed Mustang Mach-E, is not ready for prime time. Ford chose the safest path to keep its promising startup business linked to its profitable parent ship for longer. This allows the EV unit, called the Ford Model e, and other tech efforts, to invest up to $50 billion mostly in cash flow from existing Ford, to be called Ford Blue. That cash flow has been $40 billion over the past two years, which means Model E won’t have to turn to the bond or equity markets to fund expansion.

At the same time, Ford may be able to undo a portion of the hefty discount its stock trades at compared to pure EV plays. Ford’s chosen compromise was to keep its business consistent, but to report its results separately starting next year so that Wall Street could begin to assess and independently assess the growth of the electric car business.

revolve ford

will you work? For now, the answer is likely yes.

“We love the move, and we think it was frustration driven,” said Garrett Nelson, an analyst at CFRA Research. Ford [price-to-earnings ratio] Stock trading in high single digits, a small fraction of Tesla, [dropping this year] Although it has become the number two seller of electric vehicles and will grow even faster when the F-150 Lightning pickup trucks are shipped in a few months.”

Ford executives emphasized both the operational and financial advantages that keeping companies linked would give. Farley focused on the combined company’s ability to fund its growth strategy without access to capital markets, while associates detailed at a press briefing plans to share costs between the gasoline and electric vehicle businesses, cut costs in the traditional unit, and get both sides of the business working together. To boost profitability faster than they could do on their own.

“If we spin that, we’re really risking that leverage,” Farley said. “That doesn’t make sense. Leverage is the point, and we have the capital.”

Centerpiece of the plan is to cut up to $3 billion in annual costs by 2026, with key goals including Ford’s advertising budget — estimated at $1.8 billion in 2020 by US spending only Statista — and $4 billion cost guarantees. Annual, which Ford Blue Chief Kumar Galhotra said will be addressed by improving the quality of Ford vehicles.

Nelson said the company is likely to look outside the United States for several cost cuts as well, pointing to losing operations in Europe and parts of Asia.

The new growth will likely be driven by the arrival of new electric vehicles, particularly the F-150 Lightning, which Ford has for Reported 250,000 pre-orders It is working to increase production in advance for shipment this year. Ford has achieved this goal while still offering only the electric version of its market-leading pickup truck in a single body style, compared to the different cabins of different levels of luxury in conventional gasoline-powered F-150s.

The company said it expects to get it A third of car sales will be electric cars by 2026 About 2 million cars. It sold about 726,000 F-150s in the United States last year.

But there is still reason to suspect that real differences could occur sooner.

Separate talk of EV won’t go away

All of this could, in fact, better position Ford to do the rest of the deal and take out an entire Ford E unit by 2024, said Dan Ives, an analyst at Wedbush. The switches will continue to expand sales of the electric Mustang Mach-E, which has sold more than 27,000 units in 2021, nearly half the number of gasoline-powered Mustangs, and a follow-up to the early promise of the F-150 electric jet and an online electric commercial vehicle for small businesses, with other models added as the company grows.

“Within 12 to 18 months, given the success of the F-150, investors will want to see them raise capital and double,” Ives said. “When they start reporting unit sales, so you can see the demand in the electric car business, we’ll be able to assess it. It’s ultimately the first step into an offshoot of the electric car business,” Ives added.

The fundamental issues that Ford’s management faces extend beyond the automotive sector. In energy, where carbon-intensive businesses are threatened by renewables, incumbents are under threat Under attack from activists to consider side effects. Shell faced an active campaign, and its CEO responded that investors failed to understand the importance of the current cash generation model for renewable energy investments made in the future. And last year has shown to be so Peak moment in corporate restructuring of famous companies, including GE and Johnson & Johnson.

Emily Feldman, a professor of management at the Wharton School, University of Pennsylvania who specializes in corporate restructuring and divestment, says Ford and other auto companies that might follow its approach are not issuing what is likely the final say on the company’s structure, culminating in a complete break-up.

“Today, there is still value in Ford’s business of conventional electric cars and vehicles that remains integrated, whether due to cash flow or other operational dependence. At some point in the future, though (perhaps once electric vehicle technology develops further), the calculus will change. .”

The history of the market is replete with examples of where the value of separation eventually exceeded the value of integration and then abstractions occurred.

“Situations have been repeated many times across industries and time periods, whether it’s companies with old and new technology businesses, companies with mature companies and more, or companies with commodity businesses as well as finished products,” Feldman said. “I suspect the same will eventually happen to companies like Ford, GM in cars, Shell and other energy companies that have a green versus brown energy 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 make similar moves. But Jonas, who does not recommend the Ford stock, argued that relying on cash flow for the existing business is an exorbitant cost of capital invested in the high-risk electric car business.

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

The Ford family, looking over the shoulder of the board of directors and focused on preserving the “blue” Ford icon through all odds – he noted was the only one of their peers who had never gone bankrupt – had a history of what he described as “more thoughtful decisions about” the next stop. They want it to survive for the next hundred years.”

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

When a real Ford EV makes more sense

When might the official singles electric vehicle show be in the cards? It may be less dictated by a predetermined schedule of the economic cycle and when a recession occurs.

Electric vehicle financing is currently dependent on the hot-truck market in the United States, and Ford may continue to have those terms for a few years to come, with cash from conventional vehicles allowing Ford to achieve all of its goals. If a recession occurs, Colas said, “they won’t be able to get anywhere near it.” “Cars have a cyclical profit profile and those cash flows are gone, and you still have $5 billion a year in electric car investments that you need to make. Where are you going to get it when you sell less than four million cars?”

His view of the auto sector based on his time as a banker: Car companies tend to do the right thing when their backs are against the wall financially, in a weak economy. “Every other part of the cycle they are hesitant. They want to keep the critical mass,” Colas said.

A Ford EV spin-off won’t necessarily get a Tesla rating as the majority of profits over the next eight years are still residing in traditional F150 sales. But the current environment makes Ford even better at separating electric vehicles when it needs capital, and providing a floor under stock equity when the next recession hits. “You create optional and you don’t have to do anything,” Colas said. “There will always be a market for the Ford EV IPO,” he added.

Ford’s cash flow analysis and decision show a powerful force that Feldman’s research on the company’s strategy has confirmed: the inertia surrounding subproducts and divestitures.

The mindset is something like: ‘We know we’ll eventually need to break up, but the cash flow is too useful right now/ The interconnection is too complex to relax right now/[insert other explanation here], so let’s stick with the business.” She said, “Maybe that reasoning now holds true for Ford. But this mindset illustrates how and why some companies might hold on to some business for a very long time when divestitures are justified instead.”

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