Racecar-loving Ford CEO Jim Farley is in the midst of what may be the biggest challenge of his professional life.
Ford (F), which is celebrating its 120th anniversary this year, is pushing hard into what could be its path forward for the next century. Farley’s focus on EVs and transitioning the business is tantamount to the automaker’s future, and he has put his money where his mouth is from an organizational standpoint.
The iconic automaker will begin reporting its results as three separate organizations — Ford Blue (for its traditional gas powered business), Ford Commercial (for commercial trucks and clients), and Ford Model E (for its EV business) — with their Q1 2023 earnings, expected May 2.
There will be no place to hide loss-producing units like EVs after this transition.
"We do think they're following the right strategy by taking a more balanced approach towards EV growth and really focusing on building excitement surrounding individual EV models, as opposed to setting a date in the future in which they're going to be all-electric," CFRA analyst Garrett Nelson told Yahoo Finance. "We think the balanced approach is the right one, just given the fact that EVs still accounted for less than 6% of all US new vehicle sales last year."
The performance of the EV business is the one investors and Wall Street analysts are most keenly focused on for Q1. When the announcement was made about the re-org back in March last year, Wall Street rewarded the company’s stock with a bullish bump in price. The initial read: better accountability, a tighter grip on costs and more electrified profits.
But for Ford investors, that excitement seems like eons ago.
After the good news of the F-150 Lightning going on sale back in April 2022, Ford has faced a series of setbacks. Ford reported disappointing third quarter earnings after the company decided to shut down its Argo AI autonomous tech joint-venture due to issues with developing the technology and funding. Ford took a $2.7 billion impairment from the move and said its third quarter earnings were impacted by $1 billion in higher costs.
Ford’s fourth quarter earnings report wasn’t much better, with the company missing its full-year EBIT (earnings before interest and taxes) forecast by over $1 billion.
"We should have done much better last year," Ford CEO Jim Farley said. "We left about $2 billion in profits on the table that were within our control, and we’re going to correct that with improved execution and performance."
This came after crosstown rival GM reported a monster quarter and full-year profit guidance well above consensus estimates. Many on the street saw this as evidence of GM's operational prowess as it gears up for its EV transition.
"With this exceptional performance and guide from GM, we believe this was a strong statement to the Street expressing that demand worries and supply shortages are a thing of the past and to focus on the massive opportunity ahead as GM continues chipping away at its transformational story," Wedbush analyst Dan Ives wrote in a note to investors following GM's report.
Ford’s recent issues that are most concerning to investors revolve around production and reliability.
Ford is still struggling with reliability and recall costs, with the brand having the most cars subject to recall since the start of 2022 (totaling over 9 million vehicles). Farley himself has called out the high cost of recalls affecting the brand’s financial performance.
And then came production issues with its most important product release to date: the F-150 Lightning. A battery issue resulted in a fire in an F-150 that was awaiting final inspection, and the fire spread to two other vehicles. Ford halted production in early February with battery supplier SK On and won’t restart production until March 13.
"In the weeks ahead, we will continue to apply our learnings and work with SK On’s team to ensure we continue delivering high-quality battery packs – down to the battery cells," a Ford spokesperson told Yahoo Finance in a statement.
The question for investors and analysts is whether Ford’s production and reliability issues are going to plague its F-150 Lightning rollout, which is still in its nascent stage and figures to be a huge growth driver for its EV unit in the years to come.
“In the case of the Lightning, it appears to be one incident that was caught before getting to the customer, and the company is being appropriately cautious with the response,” Guidehouse Insights analyst Mike Austin told Yahoo Finance. “The bigger problem is that it’s a reminder of Ford’s continued trouble with product launches — but I think that the EV-specific issues are short-term and not a strategic error.”
CFRA analyst Garrett Nelson echoed that view, noting that Ford isn’t the only one struggling with EV reliability.
“We think it's more of a short-term thing,” Nelson says, noting that Ford's not the only one that's had battery issues. “You look at some of the smaller EV manufacturers like Lucid and Rivian, their production ramp-ups have been very disappointing.” And General Motors' Chevy Bolt battery, he added, required a costly recall and remediation.
The hope for Ford is it solves the issue with its battery partner SK On and moves forward. Ford has around 200,000 pre-orders for the Lightning, and the last thing it wants to do is have customers cancel orders because of reliability fears.
'A lot of investors are thinking they would be further along'
The emergence of car-guy CEO Jim Farley in October 2020 was a breath of fresh air for Ford faithful following the tenure of its last CEO, Jim Hackett, who had no automotive experience to speak of (he worked at a furniture company), and it showed during Hackett’s brief, yet rocky tenure.
Farley has spent years at the company in various roles, most recently as COO, and prior to that roles including running Ford's EMEA (Europe, Middle East, Africa) business and serving as chief of marketing and sales at Lincoln. Prior to joining Ford in 2007, Farley was VP and GM of Toyota's Lexus luxury division and ran all of Toyota's marketing and advertising activities in the U.S.
And Bill Ford, the executive chairman of Ford (and the great grandson of Henry Ford), is still a believer in his CEO, despite recent hiccups.
“It’s been episodic for a lot of my career,” Ford said last month at the announcement of a new $3.5 billion battery plant in Michigan. “We get it right, we slide back, we get it right. I think we probably had so much focus on the future that we perhaps took the eye off the ball a little bit on the present. But Jim’s got a full-court press on it, and we are already starting to see results.”
Guidehouse’s Austin said that "Farley has a good perspective on the big picture, especially with his global experience within Ford, and he seems to understand the urgency of transforming the company."
Nevertheless, some investors are growing impatient: After shooting from around $5 a share when Farley became CEO to around $25 a share in early January of 2022, shares have stumbled and sit around $13.
“Be patient with Ford," Farley said in an interview with Yahoo Finance in early February. “We are under double transformation. Some things are going really fast, like we're now number two in EVs, the Lightning is sold out for like another year. I kind of didn't think that would happen this fast. On the other hand, the industrial system purchasing supply chain or manufacturing or engineering, we just have to get a lot of costs out. It funds the whole future of the business.”
To placate investors, the company declared a supplemental dividend in addition to its regular dividend.
Barclay’s Dan Levy, who initiated coverage of Ford in mid-February with an Equal Weight rating and $13 price target, believes Ford is facing more difficulties with its transformation than some competitors.
“Ford is facing recessionary pressures that stand to challenge its recently robust pricing power alongside its own cost challenges, and also facing what we expect to be challenging near-term margins during the ramp of its of its EV transition,” Levy wrote in a recent note to clients. “Accordingly, we don’t see a compelling reason to own the stock today, but would rather wait for better opportunities ahead.”
CFRA’s Nelson, who has a Buy rating on Ford with a $15 price target, explained that “a lot of investors didn't have an appreciation for how difficult — what a massive global footprint that Ford has. And so I think after 2 and 1/2 years, a lot of investors are thinking they would be further along. So really, there's a lot of pressure on Farley, and he's going to really have to show some execution here in the coming quarters.”