Ford Price Estimate Revised To $12.50 On Ride Sharing, Technology Risks – Forbes
Ford Motor Company (NYSE: F) announced a change in its executive team earlier this month. Mark Fields, who took over the CEO post in July 2014 and oversaw the two most profitable years in the company’s history on a pre-tax basis, will be replaced by Jim Hackett. A number of other management changes also took place. This move followed a near 15% decline in the company’s stock price over the past few months. It is unlikely that short-term stock movements were the sole reason for the move, so below we discuss some other factors.
The first of these is that Ford failed to effectively communicate how it plans to negotiate the future auto market. As we’ve written about extensively, the idea of what it means to use a vehicle as a means of transportation is undergoing a profound shift. The combined impact of the improvement of electric battery technology, lowering prices of lithium-ion batteries that power electric vehicles, development of autonomous driving capabilities by large and small companies, and the growing popularity of ride sharing services has changed the future expectations of auto investors completely.
Even though Ford has made progress in devising a plan for this future, its communication of those plans hasn’t done enough to sway investors. The auto maker has invested in a number of software firms, announced 7 new electric vehicles and plans for 6 more, purchased a ride sharing shuttle service in San Francisco, and committed to a date for a fully autonomous fleet of vehicles. However, it hasn’t been able to build as strong a perception as General Motors, with its Maven smart mobility brand and investments in Lyft and Cruise automation.
Additionally, the auto industry continues to face challenges to its profitability. The industry has always been a low margin, high capital expenditure industry, but these trends are becoming starker by the day. Previously, investments in auto stocks were predicated on the expectation of established players capturing growth in booming auto markets such as China and India. These expectations are now jeopardized to a degree by the ongoing economic and technological changes in the auto industry.
Ford announced a plan to cut costs by $3 billion annually by culling around 10% of its salaried workforce. This may help boost the bottom line in the short term, but is unlikely to help the company solve the aforementioned issues. Accordingly, we have lowered our price estimate for Ford’s stock from $14 to around $12.50, which is around 10% higher than the current market price.
One reason for the lower valuations of the automotive divisions is the potential impact of ride sharing and autonomous driving on overall vehicle sales. Previous valuations for the divisions were derived based on the expectation of growth in the number of units sold in the long term. Absent that growth, the most valuable division for Ford becomes its leases and loans division, as a car manufacturer will still have the ability to own and make money from its vehicle fleets, whether they own the transportation service or not.
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