Why Ford’s big EV split decision might get even bigger in the future

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

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

In the biggest deal done in a long time, Ford Motor Co. decided to separate its electric vehicle business from its traditional car business last week – but notably, not to separate its EV business in pursuit of hot stock valuations. who have followed EV leader Tesla and, occasionally, fast-followers like Rivian and Lucid Group, whose share prices have suffered recently.

The company met with Wall Street halfway through its restructuring plans, which are still significant, and analysts have been very positive about the decision.

DataTrek co-founder Nick Colas, a former Wall Street auto banker who has been saying for a while that the auto company needs to convince the road that this spinoff shouldn’t happen sooner rather than later, called Ford’s move an “exciting reorganization.”

“Automotive companies don’t often shuffle their reporting/organization charts dramatically and such a move is always a risk in terms of productivity. However, it allows for clearer management accountability and that’s always good in the long run,” he said. .

The message from Ford management is that the EV business, despite solid sales of the well-received Mustang Mach-E, is not ready for prime time. Ford chose a safer path to keep its promising new business tied to a profitable carrier longer. That allowed the EV unit, dubbed the Ford Model e, and other tech endeavors, to invest up to $50 billion in the bulk of Ford’s existing cash flow, to be called Ford Blue. That cash flow totaled $40 billion over the past two years, meaning the Model e didn’t need to turn to the bond or stock markets to fund expansion.

At the same time, Ford may be able to cancel some of its significant stock trading discount compared to the pure EV game. The compromise Ford has chosen is to keep its business aligned, but will report the results separately starting next year so Wall Street can start assessing the growth of its EV business and assess it independently.

Ford round

Will this work? For now, the answer is probably yes.

“We love the move, and think it’s driven by frustration,” said CFRA Research analyst Garrett Nelson. “Ford’s [price-to-earnings ratio] stock trading in high single digits, a fraction of Tesla, [dropping this year] although they are the number two EV seller and will grow even faster when the F-150 Lightning pickup ships in a few months.”

Ford executives emphasized the operational and financial benefits the company could provide in staying afloat. Farley thought about the company’s combined ability to finance its growth strategy without accessing capital markets, while aides explained at a press conference details of plans to share costs between the EV and gasoline-powered vehicle businesses, cut costs in traditional units, and get both sides of the business to work together to increase profitability. faster than they might have done on their own.

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

The heart of the plan is to cut up to $3 billion in annual costs by 2026, with key targets including Ford’s advertising budget — an estimated $1.8 billion in 2020 by Statista for US spending alone — and $4 billion per year in warranty costs, which Ford Blue President Kumar Galhotra said it would be addressed by improving the quality of Ford vehicles.

Nelson said the company will likely look outside the US for more cost-cutting as well, pointing to loss-making operations in Europe and parts of Asia.

The new growth will likely be driven by the arrival of new EVs, most notably the F-150 Lightning, of which Ford has reported 250,000 pre-orders and is working to ramp up production ahead of deliveries this year. Ford has achieved that target while still offering only an electric version of its market-leading pickup truck in one body style, as opposed to a different cab with a different level of luxury on the traditional petrol-powered F-150.

The company says it expects to get a third of its car sales from EVs by 2026 – about 2 million vehicles. It sold about 726,000 F-150s in the US last year.

But there’s still reason to suspect a true spinoff could happen sooner.

The EV spin-off talk won’t go away

All of this might still lead to, in fact, a better position for Ford, doing the rest of the deal and actually releasing its Ford E unit sometime in 2024, said Wedbush analyst Dan Ives. The key will be to continue to expand sales of the electric Mustang Mach-E, which sold more than 27,000 units by 2021, about half the number of gasoline-powered Mustangs, and follow up on the initial promise of an electric F-150 and electric E-Transit commercial vehicle for small businesses, adding another model. as the company grows.

“In 12 to 18 months, given the success of the F-150, investors will want to see them raise capital and multiply it,” Ives said. “When they start reporting unit sales, so you can see the demand in the EV business, we will be able to assess it. This is the first step towards a spin-off of the EV business,” added Ives.

The fundamental problems facing Ford management extend beyond the auto sector. In the energy business, where traditional carbon-intensive businesses are being threatened by renewable energy sources, incumbents are under fire from activists for considering spinoffs. Shell has faced an activist campaign, and its CEO countered that investors failed to understand the importance of current money-making models for future renewable energy investments. And the past year has seen it as the pinnacle of corporate restructuring of iconic companies, including GE and Johnson & Johnson.

Emilie Feldman, professor of management at The Wharton School, University of Pennsylvania, who specializes in corporate restructuring and divestment, said Ford and other auto companies that may have followed his approach did not issue what might be the final say on the company’s structure, culminating in a complete split.

“Today, there is still value in Ford’s traditional car and EV businesses that remain integrated, either because of cash flow or other operational interdependencies. However, at some point in the future (perhaps after EV technology has progressed further), the calculations will change. “

The history of the market is full of examples where the value of the split eventually exceeds the value of the integration and then a divestment occurs.

“The situation has played out time and time again across industries and time periods, whether it’s companies with old plus new technology businesses, companies with mature businesses and nascent businesses, or companies with commodities plus end-product businesses,” Feldman said. “I suspect the same will eventually happen to companies like Ford and GM in the automotive sector and Shell and other energy companies that have green vs. brown energy businesses.”

Other automakers such as General Motors and Volkswagen will be watching to see if they can make a similar move, said Morgan Stanley analyst Adam Jonas. But Jonas, who doesn’t recommend Ford stock, argues that relying on cash flow from existing businesses is expensive capital to invest in a high-risk EV business.

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

The Ford family, looking over the board’s shoulders and focused on defending the iconic ‘blue’ Ford through all odds – he noted that it is his only partner who has never gone bankrupt – has a history of what he describes as “wiser decisions.” about the next leg. They want to stay for the next 100 years,” he said.

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

When a true Ford EV company makes more sense

When might a formal EV spinoff be around? It may be less determined by a predetermined timeline than the economic cycle and when a recession occurs.

EV funding currently hinges on a hot vehicle market for trucks in the US, and Ford could continue to have that condition for several years to come, with the cash generated from traditional cars enabling Ford to meet all of its targets. But if a recession hits, “they can’t get close to it,” Cola said. “Cars have a cyclical profit profile and that cash flow is gone, and you still have $5 billion a year in EV investments that you need to make. Where would you get them if you sold four million fewer vehicles?”

His view of the auto sector is based on his time as a banker: car companies tend to do the right thing when their backs hit a wall financially, in a weak economy. “In every other part of the cycle, they are reluctant. They want to maintain critical mass,” Colas said.

The Ford EV spin-off didn’t necessarily get Tesla’s valuation with the majority of profits over the next eight years still in traditional F150 sales. But the current environment makes it better for Ford to crank up EVs when it needs capital, and provides a base under the stock when the next recession hits. “You create the optionality and you don’t have to do anything,” says Colas. “There will always be a market for a Ford EV IPO,” he added.

An analysis of the cash flow at Ford and its decisions reveals a strong force that Feldman says has been confirmed by his research on the company’s strategy: the inertia surrounding spinoffs and divestments.

“The mentality is something like this: ‘We know we’ll have to part ways in the end, but cash flow is too useful for now/interdependencies are too complicated to let go of at this point/[insert other explanation here], so let’s get on with this business.’ This logic may be true now for Ford,” he said. But this mentality illustrates how and why some companies may stay in certain businesses too long when divestment may be necessary.”

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