Ford (F), which announced a $19.5 billion write-down in its electric vehicle (EV) business in December and is struggling to grow EV sales, is now betting on energy storage systems. At least one Wall Street analyst, namely Morgan Stanley’s Andrew Percoco, sounds upbeat on Ford’s latest venture and sees the Blue Oval’s partnership with China’s Contemporary Amperex Technology (CYATY) as its “underappreciated strategic competitive advantage.”
Meanwhile, for all practical purposes, Ford’s EV pivot was a failure despite the company burning billions of dollars in building that business, which was expected to challenge U.S. market leader Tesla. Even Ford's electric F-150, America’s best-selling gas pickup for decades, failed to cut ice with buyers. Would the energy push be the savior that Ford has long been looking for, and can the company compete with Tesla (TSLA) in that business? Let’s explore.
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www.barchart.com Ford Bets Big on Energy Storage
Ford hasn’t been a shining example of execution, and its EV business is testimony to the fact that announcements and projections don’t necessarily transform into actual results. Ford is incidentally also looking to build a $30,000 electric pickup truck, which would be available in showrooms next year. Importantly, Ford expects the new models to be profitable from the start. The company has touted the new platform as the “next Model T,” but given the company’s performance in EVs so far, I won’t yet bake in that product in my investment decision.
As for the energy storage business, that industry should see strong growth in the coming years, considering the power demand from artificial intelligence (AI) companies. As the company noted in its blog, “The convergence of data center growth, renewable energy integration, and grid resilience requirements has created a gap in the market.”
Ford plans its first customer deliveries from next year and is targeting an annual capacity of 20 GWh. The Detroit auto giant would, however, need to compete with Tesla’s Megapack, which has an annual capacity of 80 GWh split between the U.S. and China plants. The Elon Musk-run company deployed 46.7 GWh last year and is adding another 50 GWh capacity in Houston. However, given that Tesla has also pivoted to AI and is competing with tech giants, things should get a bit easier for Ford to capture at least some business from hyperscalers.
Morgan Stanley expects Ford's energy storage business to generate pre-tax profits of $588 million at 20 GWh annual production, at which point it predicts it would have a $10 billion enterprise value based on its assumption of a pre-tax earnings multiple of 17.5x.
Should You Buy Ford Stock?
In my previous article, I had noted that Ford looked like a decent buy, particularly for investors looking for high dividend stocks. Back then, Ford’s dividend yield was around 5%, which has since fallen below 4.5% due to the rally in its stock. Incidentally, Ford’s quarterly dividend has been static at $0.15 for the last four years, even though it has been paying special dividends to meet its payout targets.
Ford’s dividend yield remains quite attractive and is over three times that of the average S&P 500 Index ($SPX) constituent. However, investors shouldn’t expect either a special dividend or a dividend hike anytime soon, given where the company’s cash flows currently stand. Ford has run ahead of its mean target price of $13.31 and is rated as a consensus “Hold" by the 23 analysts polled by Barchart.
www.barchart.com Ford stock trades at a forward price-to-earnings (P/E) multiple of just about 7.5x, and while the tepid valuations make it among the cheapest S&P 500 Index stocks, it is trading at depressed levels for a reason.
Investors pay for growth, something Ford has been struggling with for quite some time now. Its EV business did not turn out to be the growth engine it was once believed to be, and if anything, it has been a drag on its profits. I would, however, be cautiously optimistic about Ford's energy storage business, given the surge in AI power demand, and see the stock running higher from these levels on the energy push.
On the date of publication, Mohit Oberoi had a position in: F , TSLA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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