Ford is about to record its first big EV loss

It's time for Ford Motor to answer the question investors have been asking for a long time: What is the cost of transitioning to electric vehicles?

‍

The automaker will switch from reporting financial results by region to by business unit starting on Thursday. To introduce the revamped reporting structure, the automaker will host a "teach-in" for analysts and the media with the theme "Ford Refounded" and release updated financial results that will show how the new business units will perform in 2021 and 2022.

‍

The traditional internal combustion engine unit "Ford Blue," the "Model E" electric vehicle unit, the "Ford Pro" commercial and government fleet business, "Ford Next," which includes non-automotive mobility solutions and another future tech, and its current Ford Credit financial services subsidiary are among the newly created business units.

‍

The modifications represent the most thorough examination of the EV business's financials to date by a legacy carmaker.

‍

In order to provide investors and analysts with a baseline for comparisons while the company's transformation takes place, the automaker is expected to disclose profits and losses, revenue, margins, and earnings before interest and taxes, or EBIT, for each of the businesses.

‍

Under CEO Jim Farley, Ford made the decision last year to isolate its two main revenue generators, internal combustion engines and its commercial fleet business, from the company's burgeoning all-electric vehicle lineup, which is not anticipated to be profitable for at least a few years.

‍

Farley and other executives have highlighted that the reporting changes extend beyond disclosure; the new format reflects how Ford's management team approaches and manages the company.

‍

"The changes are substantial. Ford Motor Company has got to reinvent its future or forge its own route that's distinct from previous firms before," Farley stated on March 2, 2022, when announcing the new business segments. "Is this a race? 100%.”

‍

Wall Street is observing the changes with a wait-and-see attitude. According to ratings gathered by FactSet, analysts typically have a hold rating with a price objective of $13.50 for the company. On Wednesday, the shares were trading at roughly $11.70 per share.

‍

Ford's stock increased by 8.4% the day management unveiled the new businesses. However, it has since fallen 35% as a result of shifting market conditions, supply chain problems, and disappointing quarterly earnings.

‍

With the revised format, the company will release its first-quarter results on May 2 and hold a capital markets day on May 22.

‍

EV losses

‍

Ford's stand-alone EV business will "create as much excitement as any pure EV competitor, but with scale and resources that no start-up could ever match," according to Farley's argument from a year ago.

‍

For the 120-year-old automaker, the legacy company is still "a profit and cash engine," according to him. Wall Street analysts predict that when it comes to Ford's electric car business, investors should prepare for significant losses, much like with other manufacturers and EV startups.

‍

The company's electric vehicle platforms, electronics, batteries, motors, embedded software, and digital experience are anticipated to be included in Model E.

‍

Adam Jonas of Morgan Stanley predicts that the Ford Model E will have negative gross margins between 10% and 20% and adjusted EBIT margins between negative 20% and negative 30%. Both would entail huge losses.

‍

Ford claims that by 2026, it would produce 2 million electric vehicles annually at 8% profit margins, helping to raise its overall adjusted profit margins to 10%. Last year, the company's adjusted profit margin was 6.6%.

‍

According to Deutsche Bank analyst Emmanuel Rosner, Ford may be suffering gross losses of around $9,000 for each electric vehicle it sells. The analyst anticipates Ford to report $6 billion in operational losses for the Model E in 2022 on Thursday. That's after taking into consideration considerable research and development investments in the EV unit, which accounts for around 65% of the company's overall R&D.

‍

In a note to investors on Monday, Rosner warned that "the EV business could record significantly bigger losses than investors expect, which could make Ford's objective of 8% EV EBIT margin by 2026 very difficult to accomplish."

‍

As the industry strives to raise EV output and manufacturing scale, no major automakers, except EV leader Tesla, are projected to produce meaningful profits from electric vehicles for at least a few years. This is especially true for mass-market automobiles like Ford's EV, which normally make less money than premium versions.

‍

Profit engine

‍

Internal combustion engine vehicles, particularly Ford's F-Series pickup trucks, which have dominated U.S. sales charts for more than 40 years, are the company's present mainstays.

‍

According to Farley, who announced the split last year, the company's operations are fueled by the giant pickups and will continue to be for "years to come."

‍

The EBIT margin for the Ford Blue brand company, according to projections from Deutsche Bank, could be 7.3% in 2022. This is more than making up for the EV losses from the previous year.

‍

According to Jonas of Morgan Stanley, Ford's proposed reporting arrangement "should corroborate our view that the ICE business (Ford Blue) is highly cash flow producing and is sustaining the capital-intensive EV business."

‍

But he said that "investors could wonder how long this could go on."

‍

Ford's strategy is to reduce structural expenses by at least $3 billion, most of which will be removed from the core company, by the middle of the decade. In the next two to three years, complexity, quality, and structural costs are expected to be reduced. This is according to Kumar Galhotra, head of Ford Blue, who stated this in March 2022.

‍

Galhotra declared in March of last year that "nothing is liable to be off the table." He added that “We need to greatly reduce our warranty expenditures and drastically simplify our complexity." We need to invest the same amount in advertising as we do in our products. These investments must be made efficiently on a global scale.”

‍

Ford Pro surprise?

‍

The Ford Pro fleet division's profitability on Thursday might have been a welcome surprise. According to estimates by Deutsche Bank, Ford Pro would have had an EBIT margin of 23.5% in 2022, making it the company's most profitable automotive division.

‍

Ford has long been a major force in the commercial fleet sectors in North America and Europe with its extensive pickup expertise and its wildly popular Transit van series. Using software and services that draw on its decades of experience serving fleet operators and that make use of the connectivity and cutting-edge technologies included in its newest vehicles, it has been working on a number of projects to boost the profitability of its fleet operations.

‍

Ford Pro's recent profit margins will undoubtedly impress, in part because of those newly developed technology-enabled products. Will they, however, last? Ford Pro's profitability "may come under strain as the segment ramps up vehicles with pricey electric powertrains," noted Deutsche Bank's Rosner, who rates Ford's stock as a sell.

‍

Ford Pro anticipates that sales of EVs will account for a sizeable portion of its business in the years to come. This is because it releases further electric models designed specifically for fleet clients. When Ford expands its EV production, that will almost certainly reduce Ford Pro's profit margins. Only 6,500 of the approximately 105,000 Ford Transit vans sold in the United States last year were electric vehicles (in 2022, the figures were still modest).

‍

Yet, fleet electrification presents Ford Pro with fresh prospects, according to CEO Ted Cannis of Ford Pro.

‍

Cannis stated at an Evercore utility conference in January that "our business customers are confused [about EVs] and they want a lot of guidance." Making it simpler is essential if we want to hasten the transition to electrification.”