Ford Motor Company (NYSE:F) yields north of 7% and has a leading presence in North America’s lucrative pickup truck market, but that hasn’t been enough to offset weakness elsewhere. Rising costs are putting pressure on its Automotive division’s margins and improving performance at its Credit division isn’t enough to fully mitigate those problems. In this piece, we will take a look at how Ford Motor Company performed in 2018 and where management plans to take the firm next over the coming years. Let’s dig in.
2018 in review
One bright spot in Ford’s 2018 performance came from its strong Ford Credit division, which is responsible for a large portion of its operating income. Revenue at this division has steadily climbed higher since 2016 while expenses as a percent of revenue have moved lower, enabling greater profitability at a time when Ford is having trouble keeping costs contained at its Automotive division. Expenses as a percent of revenue dropped from 86.29% in 2016 to 78.74% in 2018 at Ford Credit. Below is a visual representation of Ford Credit’s performance over the past three years.
Source: Ford Motor Company – Graph made by author
Below is a look at Ford’s Automotive division’s performance on a revenue and cost of sales basis, so before taking into account operating and corporate level expenses. As you can see, cost of sales as a percent of revenue has climbed from 89.15% in 2016 to 91.89% in 2018, severely putting downward pressure on Ford’s profitability. Management noted that tariffs, particularly American tariffs placed on imports of aluminum and steel, increased Ford’s costs by $750 million last year. The company also faced $1.1 billion in commodity cost increases that were unrelated to the tariffs in 2018.
Source: Ford Motor Company – Graph made by author
Ford’s management team is well aware of the need to scale back expenses across the board and recently teamed up with Volkswagen (OTCPK:VWAGY) in an attempt to save a serious amount of money. That partnership was also born from the need to reduce development costs regarding new electric vehicle offerings. Whether or not that partnership will yield favorable results is a different story, which is why Ford is also engaging in meaningful internal cost reduction programs. That includes possibly closing factories in Europe where Ford employs 54,000 people and continuing onwards with its $11 billion corporate restructuring program. These programs are also meant in part to shore up its dividend over the longer term.
Looking towards the future of the automotive industry
When looking at its Mobility division, that unit continues to represent just a tiny portion of Ford’s revenue and a modest amount of its operating expenses. Management is making investments in the future of the automotive industry with an eye on autonomous driving technology and the Internet of Everything. These types of investments will incur large losses early on “as planned” according to Ford, but that doesn’t make them bad investments. Autonomous driving, or at least semi-autonomous driving, appears to be the future of the auto industry and staying ahead of the curve is essential to maintaining relevancy in an industry in flux.
During Ford’s Q4 2018 conference call with investors, the company’s CEO stated:
“Our work on AVs and Mobility is advancing quickly. We’re connecting every new Ford vehicle in the U.S. to the cloud. And soon, these vehicles will talk to the world around them through the technology known as C-V2X. Through this, we will help usher in a new transportation system that reduces traffic congestion, accidents, and improves CO2.”
The Internet of Everything means every conceivable item and device is connected to the internet and ultimately a public or private cloud computing network as that is required to perform more complex tasks. With the rise of 5G technology, the theory is that due to the ability to upload and download enormous amounts of data in mere seconds, automobiles would be able to “communicate” with other vehicles around it and possibly even within a much larger region (like a city, for instance).
Having that information (i.e., where vehicles are within the city, how many vehicles are on each road, how fast those vehicles are moving, what road conditions are like) sent up to a major clouding computing network, which would process that data into meaningful information, could potentially reduce congestion and speed up travel times by enabling each driver to get to their end destination in the most ideal way possible. Whether that be through the driver using that information to navigate the best route possible (think a better version of your preferred internet mapping service) or through an autonomous vehicle taking that information and adjusting accordingly, there are gains to be had here.
Faster travel times and finally getting a handle on one of the biggest problems facing metropolitan areas, traffic, is a big opportunity. Big opportunities can lead to very lucrative business ventures. This is why Ford is making serious investments in its Mobility division. Autonomous vehicles will require reworked legislation and insurance policies to seriously get off the ground. Semi-autonomous vehicles are a different matter and offer the most straightforward way to capitalize on this technology, as reducing traffic accidents and mitigating the worst problems of having a human behind the wheel is another big opportunity.
Ford Motor Company is having a tough time navigating the global automobile market as its weaker international performance (particularly in China) offsets its strong and profitable North American unit. Management is acutely aware of this and making the necessary changes to address Ford Motor Company’s big issues, but this turnaround story is still in its early stages. It will be interesting to see how the partnership between Ford Motor Company and Volkswagen turns out. Thanks for reading.
Author’s note: Some of the companies mentioned above don’t trade on a major U.S. stock exchange, which come with their own unique sets of risks and rewards. Always do your own due diligence before investing.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.