Ford Motor Co (F +0.17%) is one of several automakers that have announced scaled-back production or delayed deployment of Electric Vehicles (EV). The stock market has reacted with skepticism, with Ford shares down nearly 22% in the last year.
NYSE: F
Key Data Points
Previous to the past 12 months, Ford was among a crowd of automakers announcing ambitious goals for EV production. This perceived step back from EVs has flowed from market experience; the demand for all-electric cars and trucks is less than Ford had forecast. Rather than spending billions of dollars on a smaller-than-estimated and currently unprofitable market, Ford has decided to slow the rollout of electric vehicles without abandoning them altogether. While the market has reacted negatively, Ford's embrace of the reality of the current market environment may be a catalyst to better financial results and stock returns.
The Ford+ strategy is meeting consumers where they currently are
Ford announced the Ford+ initiative in 2021, originally envisioning a prominent role for electric vehicles. The strategy, as it has been most recently communicated, is now seen by management as a mandate to provide vehicles for consumers on the consumer's terms, whether consumer electric, internal combustion, or hybrid. The plan emphasizes commercial vehicle sales as well.
The company also envisions that its non-auto sales business, including software-enabled services, will provide growth for both the top and bottom lines. For full-year 2023, Ford reported 630,000 paid software subscriptions across all product lines. In its first-quarter 2024 earnings release, the company didn't provide details on total subscriptions, but it did note that subscriptions attributable to Ford Pro, its commercial segment, grew 43% year over year. Growth in subscriptions further validates Ford's strategy since it diversifies revenue away from its traditional vehicle sales model.
Fundamental value in Ford stock
Aside from its strategic vision for the future, potential investors in Ford's stock must assess whether Ford's financial condition and operating metrics make it a compelling target for investment. When assessing Ford for value, it's helpful to compare it to its peers. General Motors Co (GM +0.14%) is not only a long-running historical competitor, but the company has also chosen a different approach to electric vehicles than Ford, making it a good candidate for comparison.
| Ticker | Price-to-earnings ratio | Price-to-free cash flow per share | Dividend yield |
|---|---|---|---|
| F | 12.5 | 7.3 | 4.95% |
| GM | 5.6 | N/A | 0.92% |
Data source: YCharts. GM had negative free cash flow for the period of comparison.
At first glance, General Motors seems to offer more "value at the price" with a low single-digit price-to-earnings ratio. However, investors looking for value would do well to examine the free cash flow and dividend strength of Ford. General Motors' comparatively weaker free cash flow situation may be due to the fact that it is sticking with its original, ambitious, electric vehicle production targets to a greater extent than Ford.
NYSE: GM
Key Data Points
In addition to the more compelling price-to-free cash flow per share, Ford also pays a more substantial dividend. Both these factors make Ford a compelling candidate for value-oriented investors.
The future of Ford for investors
While Ford is currently a better value than GM on a free cash flow and dividend yield basis, what about the future? In adjusting its EV plans, Ford seems to have firmly decided to make shareholders the beneficiaries of its updated strategy. In the company's full-year 2023 earnings release, Ford indicated a goal of returning 40% to 50% of adjusted free cash flow to shareholders, including the payment of supplemental dividends over and above its base dividend.
The divergence between General Motors and Ford in the production of electric vehicles makes Ford a natural fit for investors leery of electric vehicle hype. Owning Ford shares also preserves the potential to benefit from growth in electric vehicle adoption in the future, if or when it materializes. Ford's fundamental value in comparison to its traditional rival is another reason for investors to grab shares at current levels.
