Ford Motor Company

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Ford Motor Company is a global automaker that produces and sells vehicles and related parts and services, encompassing brands like Ford and Lincoln across diverse customer segments and geographic locations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Ford’s business is multifaceted, encompassing automotive manufacturing, financing, and mobility solutions. The company operates through its Ford Blue (ICE vehicles), Ford Model e (EV vehicles), Ford Pro (commercial vehicles), and Ford Credit segments. In the recent past, Ford has made big decisions in changing their segments and their approach towards electric vehicles. They are also spending tons in R&D to catch up to its competitors.

Business Overview and Financials:

  • Revenue Distribution: Ford’s revenue is primarily generated from the sale of vehicles and parts, and provision of related services. The company’s revenue is allocated across the three main Automotive segments: Ford Blue (internal combustion engine vehicles), Ford Model e (electric vehicles), and Ford Pro (commercial vehicles). A significant portion also comes from the financing arm Ford Credit, which offers financial services to customers and dealers.
  • Trends in the Industry: The automotive industry is undergoing a massive transformation, driven by the increasing adoption of electric vehicles and the emergence of new tech features. Traditional car manufacturers are facing pressure to adapt quickly to this changing landscape to make their new vehicles profitable. Many companies are investing in the new EV technology.

The market’s shift toward EVs presents both opportunities and challenges for Ford.

  • Margins: Ford’s profit margins are notably thin. They have struggled in the past years to maintain good margins, and have recently reported several losses due to higher costs and material prices. In 2022 they reached an average of around 6% margin, and in the recent quarters, it was negative, making cost-efficiency a primary concern for the company.
  • Competitive Landscape: The auto industry is highly competitive, with numerous established players and emerging startups vying for market share. Ford competes with a wide range of companies including Toyota, General Motors, and Tesla, plus many Chinese companies. The automotive market is seeing a boom in new electrical vehicles and new technologies, making it harder for companies to sustain their competitive advantage.
  • What Makes Ford Different: Ford is a legacy automaker with a strong brand heritage, particularly in pickup trucks. The company is focusing its efforts on innovation in electric vehicles and connected technologies while trying to leverage its existing market and client base. However, in practice, it has faced many difficulties to reach profitability with its strategy and is struggling to keep up with the pace of competitors.

Financial Deep Dive:

  • Reorganized Segments Ford has reorganized its financial reporting into three main automotive segments: Ford Blue, focused on internal combustion engines (ICE); Ford Model e, focused on electric vehicles (EVs); and Ford Pro, focused on commercial vehicles. There is a separate segment for Ford Credit. This restructuring aims to reflect the company’s strategic shift towards electrification and targeted commercial solutions.
  • Revenue Analysis Ford’s consolidated revenue for the second quarter of 2023 was $42.4 billion. Ford’s total revenue has remained somewhat stable, and did not increase from the second quarter of 2022.
  • Earnings Analysis Ford reported a net income of $2.1 billion in Q2 of 2023 compared to $0.667 billion for the Q2 of 2022. Ford has been posting inconsistent earnings and is very sensitive to economic conditions, making it a risky stock for investors.
  • Profitability Analysis Ford’s gross margin improved to 13.7% in the second quarter, up from 12% in the prior year. The adjusted EBIT margin improved to 8.1%, up from 3.3% in the prior year. However, for a longer time horizon, it is still struggling with a negative margin.
  • Balance Sheet Health: Ford has a reasonably healthy balance sheet, but its large amount of debt could pose a problem. As of September 30, 2023, Ford had cash and equivalents of $26 billion, and their total assets were $250 Billion and liabilities were $176 Billion. The net long-term debt is about $114 Billion. Ford has a lot of investments and also goodwill of $2.4 Billion. While the company seems to be able to handle debt for the moment, they are more prone to negative effects of high-interest rates.

Ford’s financial health is reasonably stable, but its large debt, fluctuating cash flows, and the uncertainty of the future with the EV transitions must be carefully considered.

Moat Rating: 2/5

  • Justification: Ford’s moat is weak. It has some degree of brand recognition but not enough pricing power. Ford’s long history with pickup trucks and some degree of economies of scale are there, yet it is in a very competitive and fragmented market, without sufficient pricing power, and it is also struggling to compete with new EV companies like Tesla and Chinese competitors.
  • Sources of Competitive Advantage:
    • Brand Recognition: The company’s Ford and Lincoln brands have a long-standing history and customer loyalty. However, many times the brand loyalty and brand recognition does not translate into pricing power.
    • Scale: Ford benefits from economies of scale in manufacturing and supply chain management. However, these are not impossible for competitors to achieve.
    • Distribution Network: Its extensive network of dealers, distribution systems, and manufacturing is very hard to replicate, allowing it to deliver vehicles efficiently in different markets, but competition is not that much smaller when compared to Ford.
  • Lack of Moat
    • Weak Pricing Power Ford is a price taker, meaning they have to adjust to market prices and are not able to take advantage of the brand or its historical success to enforce higher prices.
  • No Unique Product/Services: Ford is mainly in the production of automobiles, which is not a differentiated market as many companies produce the same type of vehicles. The electrical vehicles are not that much differentiated either, especially in the higher price ranges where most of the profits come from. * Intense Competition: Ford is in an industry that has a ton of competitors and new tech companies are entering that industry as well.

Risks to the Moat and Business Resilience:

  • Technology Disruption: The rapid shift towards electric vehicles and autonomous driving could render Ford’s existing technologies and capabilities obsolete. Ford is falling behind in the technology department. It needs to spend more in R&D and have new innovations that competitors do not have to establish a clear leadership in the EV market.
  • Intense Competition: Competition from other legacy automakers, startups, and overseas manufacturers may put pressure on Ford’s prices and margins, especially if those competitors are able to produce EVs more profitably.
  • Economic Downturns: A global recession or economic slowdown could significantly reduce demand for automobiles, hurting Ford’s profitability and cash flow.
  • Commodity Prices: Rising raw material prices for metals, semiconductors, and other components could squeeze Ford’s margins.
  • Supply Chain Disruptions: Like COVID-related shortages, any further disruptions in the supply of necessary parts could limit production capabilities.
  • Government Regulations: Stricter environmental regulations and trade policies will affect operations of companies like Ford.
  • Labor Issues: Unions can also significantly impair the operations, as can be seen from the recent UAW strikes.
  • Management Execution: Ford has had a mixed track record with recent product launches and strategic initiatives.

Business Resilience:

Ford has demonstrated a degree of resilience in the past by weathering various economic downturns, such as the financial crisis. However, the present situation is more challenging for the company, as the transition to EVs is complex and requires constant investments, and with the added risks mentioned above, Ford’s resilience is not guaranteed.

Understandability Rating: 2/5

  • Justification: Understanding Ford requires navigating a complex web of automotive manufacturing, finance, and technology, making it more complicated than other car manufacturers. Furthermore, the company’s restructuring and its financial presentation add additional layers of complexity that make the company less easy to understand, especially for someone not having a great understanding of the automotive industry and financial statements.

Balance Sheet Health Rating: 3/5

  • Justification: Ford has a moderate balance sheet health. While it holds a solid cash position to navigate current challenges, its huge debt load, and the fact that the company is losing money, create some downside risks. Its ability to manage those debts over long term and to show profitable results will greatly influence the future health of the balance sheet.