Ford - There's No Turning Back Now

John Chapter 8 verses 31-32 state, "To the Jews who had believed him, Jesus said, If you hold to my teaching, you are really my disciples. Then you will know the truth, and the truth will set you free."

As a Christian, I believe Jesus Christ is God. Why do I believe this? Because it is what Jesus taught and why the Pharisees had Him crucified. But this was the entire reason why Jesus Christ was born and came to earth, to die and rise from the dead as only God could do. So what is the truth that sets us free? The truth is that death is defeated and humanity has no control above what God has already done and accomplished.

For investing, there are truths as well. The most straight forward is that as a company executes, succeeds, and grows over time, it will yield an investment return. The challenge is always at what valuation will the SP equate to that return. The common ground I find with the truths of Jesus and God's word from the Bible for investing are that the world often looks to distort and challenge reality, logic, and practicality, regardless of the situation, but no matter how hard the world tries to muddy the waters, truths always win out in the end.

It's pretty interesting. Back in 2011 Tesla, Inc. (TSLA) was simply one of many green energy companies funded by the U.S. government, with nearly all going bankrupt over time (great use of taxpayer dollars). A little over ten years later, and Tesla is now the largest EV producer in the world.

2020 was a pivotal year for the EV Revolution. It was pivotal for two reasons. First it has set a new path forward for where EV technology is anticipated to go. And second, it also clearly delineated three categories of players - vertically integrated EV leaders, traditional automotive OEMs, and de-SPACed EV pretenders.

I recently read RBC Capital's downgrade on Ford Motor Co. (F) and it was odd to say the least. Here's the summary high points:

The company's turnaround is "well underway" and it should continue to transition towards a "EV/AV/software world", the analyst tells investors in a research note, adding that Ford got its Mach-E to market quickly and also brought its F-150 Lightning to market ahead of competitors. Spak adds however that while he remains positive on Ford's ability to make "new auto" progress, he sees less near-term stock upside, with added concerns on how shares would react if pricing rolled later this year and if Rivian (RIVN) sold down.

Ford's Mach-E finished 2021 with 27,140 units sold for 2021. While Ford states that this is second to only Tesla based on U.S. units sold, Tesla delivered just below one million EVs in 2021, or close to 25% of what Ford did in 2021. At the same time, the F-150 Lightning Electric Truck has not yet begun selling vehicles and the original SOP date for 2022 is already being delayed. I find RBC Capital's stance on the Lightning premature to equate it with the Mach-E actually selling vehicles.

More baffling is the tying of Ford's SP performance to Rivian Automotive, Inc. (RIVN). Rivian is clearly the leading EV truck manufacturer and winner of first-to-market. Ford's F-150 already has a reputable brand with market power. So Ford's progression of its EV version will not be competing against anyone but itself. This is the first hurdle to cross as the F-150 is not the Mustang, where the Mach-E was not a product comparable to the tastes of existing non-EV Mustang customers. Moving forward, I will be very interested in seeing how both Mustang and Mach-E units sold track against 2021.

For the F-150 Lightning EV, Ford will be in a similar position, but the key will be to see not only the rate of growth of the EV F-150 version, but also whether it will be able to fully cannibalize the non-EV F-150 and achieve similar annual unit sales. Nearly 40% of Fords U.S. vehicle sales were from the F-150 make and models. The other key makes for Ford include the Bronco Sport, Escape, and Explorer attributing for another 25% of U.S. vehicle units sold.

I also find the analysis premature with respect to the EV/AV/software world comment of Ford being "well on its way". There was a recent update regarding General Motors Company (GM) targeting Carvana, Inc. (CVNA) and Vroom, Inc. (VRM) by developing a digital e-commerce used vehicle competitive product. What wasn't entirely clear from the update was how Revenue would be collected between GM and dealerships, while Cadillac was going to focus on its own e-commerce site. Ford has similarly expressed interest in an e-commerce used vehicle sales digital platform.

Similar to GM, Ford will struggle in my opinion to become a leader in AV and other technology elements. I don't have high confidence that Ford, nor GM for that matter will be capable of becoming a "jack of all trades" within five years let alone ten. The competitive pressures on all sides against Ford and GM are all well capitalized and laser-focused on what they do, while traditional automotive OEMs will continue to need to address all of these issues, all at the same time. This is a nearly impossible task, especially as Ford will be required to continue to sell non-EV vehicles and manage combined supply chain needs.

The good news is that I'll be covering all of these aspects each quarter with all new updated information pieces. Ford is expected to begin selling both the F-150 Lightning EV and its E-Transit as well in 2022. When they begin production remains to be seen. With Ford and GM touting how great they will become, there's definitely no turning back now.

Today's markets have become highly sensitive to information as algorithms look to maximize trading strategies while information is regurgitated and rehashed over and over again to influence SPs. Commentary from RBC Capital is highly premature as it has already identified Ford as a winner when the company in reality has produced 27,140 EVs, and nothing more. Ford doesn't deserve a free pass and I am skeptical of the company's ability to go much further from what it has accomplished the past 40 years, EV or not. This is why the company's SP hasn't moved much from the 1980s until the last year, which was all supported by hype.

Morgan Stanley has played this game with GM in late 2020 and later with Ford last year. Morgan Stanley wisely has toned down these hype hyperboles and shifted gears to focus on Ferrari (RACE) and Rivian instead. As I've said before, companies like Lucid Group (LCID) and Rivian in many ways have less risk than traditional automotive OEMs like Ford and GM as they are more focused purely on EVs with an entirely different direct-to-consumer model. With Ford and GM producing close to 30,000 EVs in 2021, they are not much further ahead, and they are not likely to ramp up much further if at all over the mid-term. Investors taking the public banter literally are going to face disappointment. At best, I see Ford becoming an EV player not that different that its pre-EV days over the past 40 years.

The entire automotive industry is changing from every aspect of what it has been for a long time, and legacy peers are much too far behind to pivot to becoming leaders in a matter of years, while their competitors have been at it for more than a decade. I don't think that companies like Ford and GM will go away per se, but I do see major long-term risk for their relevance with the EV future completely wide open for the strongest innovators and risk takers becoming the biggest winners.

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