The COP26 summit in Glasgow brought parties together to accelerate action toward the goals of the Paris Agreement and the UN Framework Convention on Climate Change. Most countries are targeting net-zero emissions by 2050, and the US administration supports a goal of emission-free electricity by 2035. With this as a backdrop, Ford (NYSE:F) and other major automakers are racing to create production capacity for EVs to meet what’s expected to be rapid adoption in the emerging segment this decade.
A news article published in Phys.org entitled “Under pressure to change, Ford is reinventing itself” on Jan. 11, 2019, noted:
“Struggling with a sagging stock price and sluggish sales, US car giant Ford took steps to regain its footing this week with the announcement of a massive restructuring effort in Europe—even as it prepared for an imminent strategic partnership with German carmaker Volkswagen.”
When this article was written, Ford already stopped producing sedans and small cars to save $11 billion in the U.S. and eventually scrapped the Fiesta, Focus, and Mondeo models in Europe, where they were popular.
As a result of its “reinvention,” Ford revenue increased 7.2% in 2021 as net income grew from -$1,279 million in 2020 to +17,940 million in 2021. But then again, so did its competition, as shown in Table 1.
While revenues exhibited single-digit revenue growth, net income exhibited double and triple digit growth. Net income skyrocketed in 2021 as car companies generated income by eliminating incentives, selling cars above MSRP, shuttering production of ICE vehicles, and reducing dealerships (9,955 in 2021 compared to 10,717 in 2020 at Ford).
The Semiconductor Shortage
Ford has had additional headwinds in the past few years tied to the “semiconductor shortage,” as the company shuttered ICE factories. The “semiconductor shortage” affected ICE vehicles even though “The average electric vehicle has about 2,000 chips, roughly double the average number of chips in a non-electric car,” noted U.S. Commerce Secretary Gina Raimondo in late 2021.
I attempted to explain to a lot of naysayers in my April 8, 2022 Seeking Alpha article entitled “Ford: Profits Soar Amid So Called Chip Shortage:”
“Car buyers are being duped into paying above MSRP (manufacturer’s suggested retail price) when they go to a dealer and see empty lots and when they continue to read about a “semiconductor shortage” that’s responsible. In fact, it’s the move to the “Green New Deal” that’s responsible. This has resulted in EV’s stronger demand, which is limiting production and semiconductor allocation, not a “semiconductor shortage”, particularly when EV sales are growing in double digits and ICE sales are flat.”
Ford’s CEO Jim Farley confirmed my thesis of the semiconductor shortage for ICE only when he said during a webcast for the CNBC Investing Club with Jim Cramer:
“We’ll get the semiconductors, that’s a matter of prioritizing the (battery-electric vehicles) over the (internal combustion engine) vehicles. The issue is batteries. That’s what we have to solve.”
As an example, Ford reported that the 2022 Ford F-150 Lineup would drop the Max Recline Seating option, which was introduced in the 2021 Ford F-150. According to the Ford Authority article, “No specific reason for this change was given, though but it is likely due to the ongoing semiconductor chip shortage.”
However, the Max Recline Seating Option is available in the 2022 F-150 Lightning EV. In essence, the “semiconductor shortage” affected ICE F-150s but not EV F-150.
Ford is Not Alone In The Semiconductor Shortage Debacle
In their latest quarterly earnings report, the auto companies below all reported vehicle sales were down in the quarter but EV sales were up:
- Truck sales down 17.8% Y/Y to 79,768 units, Cars sales down 57.7% Y/Y to 4,388 units, Electrified vehicles sales +50.2% Y/Y to 16,779 units and SUVs +2.7% Y/Y to 92,809 units.
- Quarterly Sales: For Q1, Toyota recorded sales of 514,592 vehicles, down 14.7 Y/Y on volume basis. Electrified vehicles represented 25.8% of total sales volume to 132,938 units in Q1, up from 22.9% a year ago.
- Consolidated shipments of 1,374 thousand units, down 12% primarily due to impact of unfilled semiconductor orders. Stellantis low emission vehicles product momentum continues, leading to Enlarged Europe BEV sales being up more than 50% year-over-year.
- U.S. total sales slipped 27.2% Y/Y to 108,075 units in March. Electrified vehicles sales up 20.7% Y/Y to 12,661 units.
- Hyundai Motor America reported a 20% Y/Y decline in April’s retail sales volume to 61,668 units. Electrified vehicle retail sales increased 68% during the month.
Mercedes Benz (OTCPK:DDAIF)
The Chart below shows Mercedes’ ICE and EV sales
Ford’s EV/PHEV Sales Comparison
The point of this article is to determine whether Ford can use its century-old ICE production infrastructure to become a good EV stock to buy and hold. Table 2 shows that Ford sold 7,706 EVs in Q1 2022 in the U.S., representing 4.4% of the total 173,561 EVs sold in the U.S.. This was down from 6.7% in the year ago quarter, as total EVs grew 75.9% while Ford grew just 16.5%.
Ford fared better in the plug-in electric vehicle (PHEV) market, representing 22.9% of the total PHEV vehicles in Q1 2022 from 16.4% the year ago quarter. Ford’s growth in the PHEV market was 56.8% QoQ versus just 18.6% for the overall PHEV market.
For full-year 2021, Ford sold 27,140 electric vehicles, up from just 3 the previous year. Ford’s share of the EV market increased to 5.9% in 2021, at a time when Ford’s share of 12.6% of the overall light vehicle market in 2021 decreased from 14.0% the previous year.
Ford’s EV Supply Chain
The key component of an electric vehicle is the lithium ion battery, invented by John Goodenough, who won the Nobel Prize in Chemistry in 2019 as a result, and incidentally was my PhD thesis advisor at Oxford University.
Components of the battery are numerous, and some, such as Lithium, Cobalt, and Copper, are subjected to supply chain disruptions and price volatility, according to the report entitled “Global and China EV Batteries and Materials: Technology, Trends and Market Forecasts.”
A recent article in Barron’s noted that a basket of metals that go into lithium-ion batteries was up about 40% year to date before Russia invaded Ukraine. It has risen another 13% since then as the war makes inflation worse. As a result, it’s critical that an EV manufacturer develop partnerships with various battery manufacturers.
Ford’s global BEV (battery electric vehicle) plan calls for at least 240 gigawatt hours (“GWH”) of battery cell capacity by 2030 – roughly 10 plants’ worth of capacity. Approximately 140 GWh will be required in North America, with the balance dedicated to other key regions, including Europe and China.
Ford has established several deals to assure its supply chain is uninterrupted as it moves forward with its EV goals:
- In China, the automaker will get its batteries from CATL and BYD (OTCPK:BYDDF).
- In the U.S. and Europe, Ford is teaming up with battery maker SK Innovation to source batteries and create the new battery production joint venture, BlueOvalSK.
- Ford has inked a new deal to buy it from a Lake Resources NL facility in Argentina aims to buy 25,000 tonnes annually of Lithium from Lake’s Kachi project in northern Argentina.
- Ford has partnered with Redwood Materials on a new battery recycling venture.
- Ford established a global battery center of excellence – named Ford Ion Park – to accelerate its battery and battery cell technology R&D – including future battery manufacturing. Ford Ion Park represents $100 million of Ford’s $185 million investment in developing, testing, and building vehicle battery cells and cell arrays.
Competition is strong and growing in the electric vehicle business. Volkswagen, for example, wants half of its vehicle sales to be electric by 2030 and nearly 100% electric sales by 2040. Audi will launch fully electric models from 2026 and aims for all car sales to be electric by 2030. General Motors has announced it will invest $35bn in electric and autonomous vehicle product development until 2025 and that it will phase out petrol and diesel cars by 2035.
Chart 1 shows February 2022 electric vehicle sales. The Ford Mustang Mach-E is at the bottom of the list.
On the positive side, the benefits are even greater. According to the International Energy Agency based on COP26, more than 60% of passenger car sales must be EVs by 2030 for the world to be on track to net-zero greenhouse gas emissions by 2050.
China is a strong proponent of electric vehicles and wants 70% of passenger vehicles electrified by 2025 and 100% by 2035. Norway is a leader in the EU — in 2021, 93% of new car registrations in the country; 65% of new car registrations in the country were all-electric battery electric vehicles, and 28% were hybrids. The UK wants to phase out petrol and diesel vehicle sales by 2030, and all sales to be electric by 2035.
Ford is transforming its automobile business by splitting into two separate units: Ford Blue, for traditional gas- and diesel-powered vehicles, and Ford Model e, for new electric models. Ford Blue and Ford Model e will operate as distinct businesses, but share relevant technology. Ford expects to spend $5 billion on EVs in 2022, and produce more than 2 million electric vehicles annually by 2026, representing about one-third of Ford’s global volume, rising to half by 2030.
Ford stock price has shown continuous growth even as the COVID pandemic was accelerating. The stock reached a high in January 2022 and then started dropping as inflation rose and the 10-year treasury rate started increasing, as shown in Chart 2.
Chart 3 shows the inverse relationship between F stock and the 10-Year Treasury Rate. It is the 10-year Treasury rise that has primarily decimated technology stocks, and it shows it has done the same to Ford.
Another headwind, Chart 4 shows the direct correlation between consumer sentiment, which is at 65.20 in April 2022, and U.S. auto sales. In other words, when people feel poor, they stop buying.
Chart 5 shows that Ford has the highest Seeking Alpha Quant Rating of top competitors, ranked 1 out of 31 automobile manufactures.
Chart 6 shows the best Seeking Alpha Quant Factor, well ahead of top automobile competitors.
Based on my analysis of Ford’s EV strategy, development of its supply chain, and financial metrics, I rate this company a buy. Currently F-150 Lightning trucks are now being built for customers across America, as Ford initiated production of EVs in Michigan. The Mustang Mach-E is union-made in Mexico. The stage is set for full production, and now would be the time to consider dipping your toes into the market.
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