Ford has an $80B beast under the hood. Will investors start noticing?
Things are changing fast in the auto industry. U.S. electric vehicle sales year-over-year growth slowed to 3.3% in the first quarter of the year. EVs accounted for 7.2% of the total market, down from 7.6% a year ago. In response, Ford (NYSE:F) disclosed in April that it will delay rolling out a new electric pickup truck as it adds gas-electric hybrids to its model lineup. The Detroit automaker also said plans for a big electric SUV, with three rows of seats will be delayed by two years until 2027.
While the EV business is growing at a rate below initial expectations, Ford (F) has a beast under the hood with the Ford Pro business. The nearly $60 billion business within Ford serves commercial customers with a one-stop shop of work-ready vehicles, service, software, charging, and financing solutions that can make running a fleet simpler and more productive. Ford Pro achieved first-quarter revenue of $18.0 billion, up 36%. Notably, the segment’s EBIT margin of nearly 17% exceeded the sustained mid-teens margin target set for the business. Morgan Stanley analyst Adam Jonas highlighted that Ford Pro generates EBIT of $8B. “At 10x EV/EBIT, in-line with public comps, Pro could hypothetically be worth $80bn as a stand-alone. But at a total Ford EV of ~$40bn, the implied conglomerate discount is considerable,” he observed.
Jonas said Ford Pro may be one of the strongest and most profitable franchises in global autos. Ford Pro is seen as a market-leading commercial-fleet solutions provider with a growing, high-margin software and parts business. Morgan Stanley forecasts annual revenue growth of ~1%, but EBIT growth of 3.5% through 2030.
Crunching the numbers: Jonas and his team see the hypothetical stand-alone value of Pro in the neighborhood of $20 to $25 per Ford share. By taking into account the valuations of truck companies such as Daimler Truck (OTCPK:DTRUY), Volvo Trucks (OTCPK:VOLAF), and PACCAR (PCAR), as well as machinery companies like Deere (DE), Caterpillar (CAT), and Oshkosh (OSK), the firm calculates a median comparable of around a 10X near-term EV/EBIT trading multiple. That works out to an $80B enterprise value for Ford Pro, well above the current market cap of $50B and roughly double the current enterprise value of Ford, excluding Ford Credit debt. The clear takeaway is that investors are still worried about Ford Pro’s profits being sunk into funding the losses of other parts of the Ford (F) franchise.
Morgan Stanley thinks Ford’s (F) management understands the reality in the automobile industry that overly aggressive EV strategies are unsustainable, with even Tesla (TSLA) struggling on the cash flow front. The firm’s Overweight rating on Ford (F) is underpinned by the expectation that the Detroit-based company will make substantial improvements in incremental invested capital employed. Those financial levers could include scaling back on EVs to protect the cash flows from Pro, F-series, and specialty segments such as Bronco, Mustang, Raptor, and Ford Credit. Looking ahead, Ford (F) is seen returning a greater percentage of incremental cash flows to shareholders.
As it stands now, Ford (F) ranks 10th out of all of the S&P 500 companies in terms of the lowest forward price-to-earnings ratio. The auto stock also has very high Seeking Alpha factor grades for valuation metrics. Seeking Alpha analyst JR Research has a Buy rating on Ford (F). “With the recent pullback reducing the optimism surrounding Ford’s Q1 earnings release, Ford investors have been given another solid opportunity to add more shares,” he advised.