Q2 2024 Earnings Summary
- Ford Pro is exhibiting strong growth and profitability, contributing a significant portion of the company's earnings and offering high-margin opportunities beyond vehicle sales, such as parts, services, and software.
- Ford is implementing innovative design and development processes through its Skunkworks team, focusing on cost-efficient production of affordable EVs, and aiming to match competitors like Tesla and Chinese OEMs in cost and efficiency.
- Strategic partnerships, such as with CATL for battery technology, are enabling Ford to secure competitive advantages in EV production without over-reliance on external platforms, enhancing capital efficiency and maintaining control over core competencies.
- Despite higher earnings, Ford's capital base has expanded significantly, so returns have not improved, raising concerns about capital efficiency and structural costs not decreasing in the near term.
- Ford is not returning capital to shareholders via share buybacks, with the Board refusing to authorize them, indicating potential concerns about immediate shareholder value and suggesting better uses of capital that may not immediately boost shareholder returns.
- There is uncertainty about the sustainability of pricing strength in the Ford Pro segment, with expectations that "we expect, as we move into the '25 model year, that there will be some of the top line coming off, and that's in our guidance", implying potential risks to future revenues and margins as pricing may decline.
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EV Strategy and Competition
Q: Can Ford profitably make low-cost EVs without China's help?
A: Ford is developing its own low-cost EV components through its Skunkworks team, aiming to produce affordable EVs profitably without relying on Chinese platforms. They have a strategic partnership with CATL for battery technology but focus on designing breakthrough EV components that are better and cheaper, ensuring they remain competitive globally. -
Persistent Warranty Costs
Q: What's causing ongoing warranty issues?
A: Ford faces warranty costs due to issues in older models, such as rear axle bolts in 2021 vehicles and oil pumps in 2016 models. While recent quality improvements are evident in better J.D. Power IQS scores, there's a lag before warranty costs decrease. Ford is enhancing testing protocols and utilizing over-the-air updates to detect and fix problems early, aiming to reduce future warranty expenses. -
Capital Allocation Strategy
Q: Why not authorize a share buyback given stock value?
A: Ford believes investing capital in growth opportunities offers better returns than share buybacks. They are channeling funds into exciting ventures like Ford Pro, electric architectures, and service businesses, which have high-margin potential and significant growth prospects, rather than repurchasing shares. -
Ford Pro Pricing Sustainability
Q: Is strong pricing in Ford Pro sustainable?
A: Strong demand and product freshness support sustained pricing in Ford Pro. Although some moderation is expected, the demand-supply imbalance remains favorable. About 60% of Ford Pro's business is from fleet contracts negotiated annually, and early indications for the 2025 model year are positive. Investment in new products across the lineup enhances competitiveness and supports pricing. -
Electrification Amid Policy Shifts
Q: How might elections impact Ford's EV strategy?
A: Ford's commitment to electrification remains firm irrespective of potential policy changes. Believing that competition from Chinese EV manufacturers will shape the industry, Ford is focused on being fully competitive globally. They emphasize manufacturing flexibility and offering customers choice, investing in both EVs and partial electrification solutions. -
Super Duty Capacity Expansion
Q: Will demand absorb increased Super Duty capacity?
A: Ford is confident that increased Super Duty capacity will be absorbed by strong demand, particularly in the chassis segment, which comprises 25% of Super Duty sales. With aging fleets in industries like infrastructure and emergency services, and a diverse multi-energy powertrain offering, Ford anticipates sustained demand for many years. -
Used Vehicle Residual Values
Q: What's the outlook for used vehicle residuals?
A: Auction values are down 9% year-over-year but have increased 3% sequentially. While a continued decline in auction values is expected in the second half, constrained supply in the used market may support new vehicle pricing. Ford Credit is monitoring return rates and market trends closely.
Research analysts covering FORD MOTOR.