Ford’s Underrated Multi-Billion Dollar Turkey Excitement (NYSE:F)

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All sorts of things in our world are not what they used to be decades ago. Donald Trump is not just a real estate developer. Volvo is not Swedish anymore (it’s Chinese). Dan Ford (NYSE: F) has important operations in Turkey.

Turkey? What’s that?

OK, most of you know Turkey is a country… somewhere. But why has Turkey suddenly become more important than it has been for over a century?

We live in a world of increasing geopolitical risks, including new tensions on just-in-time inventory management (JIT) and supply chain disruptions of all kinds. Over the last half century, and particularly the last 30 years, supply chains have expanded globally to take advantage of ever-increasing efficiencies, meaning placing them further away where they incur higher costs and transportation risks if there is a breakdown anywhere along the way.

Ford forms partnership in Turkey

In this context, Ford’s strategy of R&D and manufacturing locations outside of China – but still not in North America or in Europe – has taken on a new level of importance. Ford has a 41% stake in Ford Otosan (FROTO), which is a Turkish entity. It has about 15,000 employees, 10% of whom are engineers.

Focus on vans and trucks

Ford Otosan has primary R&D responsibility within Ford for the delivery van (“panel van”) product line. There are three basic sizes/platforms of the van, only two of which are sold in the US. All three sizes are sold in Europe.

These delivery vans are becoming increasingly important socially and economically in 2020 with the home delivery boom. Not only Amazon (AMZN), but also the increasing share of traditional retailers, is seeing an increase in new or existing home delivery businesses.

Production capacity doubled from 450,000 to 900,000

By early 2022, Ford Otosan in Turkey has the capacity to produce 330,000 Transit and Custom vans, plus 110,000 Courier vans – per year. In addition, 15,000 large commercial trucks.

In reality, these Ford Otosan factories are operating well below capacity by 2021, producing about 348,000 units. This will change in 2022 and beyond, not only due to higher capacity utilization within Turkey. Ford Otosan acquires Ford Europe plant capacity located in Romania. This means that Ford Otosan’s overall annual production capacity will be around 900,000 units in a few months from now.

If you apply Ford’s 41% stake in Ford Otosan to an all-in-one production capacity of 900,000 units per year that will soon be in place, that’s 369,000 equivalent units allocated to Ford’s shareholding. These commercial vehicles, from small delivery vans to large trucks, are considered some of the most profitable vehicles in the industry. It is also the reason why they are given priority in terms of allocation to semiconductors and other components.

Proportionality inside Ford

If you count the 348,000 vehicles actually sold in 2021 within Ford’s overall 3.9 million global figure, that’s about 9%. For a total 2021 capacity of 455,000, almost 12%. Then, looking to late 2022 or 2023, that could potentially be 900,000 capacity divided by 3.9 million (assuming Ford as a whole doesn’t move, a dubious assumption). At that point, we’ll be taking about a significant 23% inside Ford.

Then again, a 21% stake in Ford – which implies 369,000 capacity units post-Romania acquisition – would imply “only” a 9% interest rate for Ford as a whole.

That would be 9% higher than Ford Otosan’s overall revenue as a percentage of Ford’s overall – $7 billion last year compared to $136 billion for Ford as a whole. Of course, that revenue contribution will be much higher next year after the Romanian integration of Ford Otosan.

Ford Otosan has a market capitalization of approximately $7.3 billion. Therefore, Ford’s 41% stake in Ford Otosan will be worth about $3 billion. That’s just under 5% of Ford’s overall market cap, reflecting that the Ford Otosan may be undervalued (7% of revenue, but 5% of market cap) in Ford’s portfolio, especially if one makes the argument that the Ford Otosan product mix (trucks and vans) ) really should be priced higher than the average Ford vehicle, globally.

Otosan reduces and diversifies geopolitical risk for Ford

Although Ford made Transit vans both in Kansas and in Turkey, the Ford Otosan didn’t really “compete” with Ford’s North American operations. In contrast, Ford Otosan serves as a counterweight to Ford’s development, manufacturing, and component supply chain that spans mostly from Europe to Asia.

We saw in 2020 how China decided to isolate itself from the rest of the world. It is very difficult even to travel to China. For example, consider how Finnair had to completely transform its business, which until January 2020 had previously been based on flying over Russia into a long list of cities in and around China. In 2022, we have seen the second wave of China’s lockdown.

By investing in R&D and production in Turkey, Ford spreads the risk of unforeseen political events in Asia as well as in Europe. Turkey is a somewhat uncorrelated geography, not tied to any major power or organization (other than nominally being part of NATO).

Impact on Ford shareholders

Ford’s structure to increase its exposure to Turkey, with local Turkish partners, helps reduce risks to Ford’s overall global supply chain and ability to serve customers in most geographic areas. The least impact is probably for the US market, which is also the reason why US shareholders have the hardest time seeing the benefits of this de-risk.

When combined with the calculations outlined above – which suggest that Ford Otosan is undervalued within Ford’s overall shareholder umbrella – this added benefit of Ford facing a new and more uncertain world with lower geopolitical risk compared to the European Union and Asia. centered on China. make a better case for stock Ford.

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