Al Root
Ford Motor has a Ferrari inside of it. The bigger it grows the harder it will be for investors to ignore.
No, Ford doesn't have a dominant ultraluxury car brand that generates operating-profit margins north of 25% with regularity -- like Ferrari. Although the $300,000 Mustang GTD is a very cool car.
The business inside of Ford that deserves more attention is Ford's commercial business Ford Pro, where recent success highlights the growing benefits of vehicle connectivity and software as a new source of sales and earnings for the 120-year-old auto maker.
Ford has always served fleet operators, but Pro is a relatively new concept for investors. The company just started reporting Pro numbers as a separate business segment. In 2023, Pro sold 1.4 million vehicles and generated an operating profit of $7.2 billion on sales of $58.1 billion. Sales grew 19% year over year. Operating-profit margins, north of 12% in 2023, improved by almost six percentage points.
Ford's overall 2023 operating-profit margin was 5.9%.
Pro margins can improve to "midteens" levels by 2026, says Ford, partly driven by more software subscriptions that help commercial-fleet operators lower costs by reducing downtime and improving driver efficiency.
Taking a vehicle off the road can cost a fleet operator $12,000 to $22,000 a day, says David Prusinski, Pro's chief revenue officer.
His job is to scale Pro's software business by saving customers money by improving uptime. Prusinski isn't a Ford lifer. He arrived via software start-ups in late 2021.
"I sat down with [Pro CEO] Ted Cannis and the conversation was amazing," he says. "I started to truly understand how Ford could be one of the progenitors [of] software-to-service."
Ford's telematics and software business ended 2023 with roughly 500,000 subscriptions, up 46% year over year. Ford wants to triple that number in the coming years.
Subscription sales aren't the only benefit of connectivity and data. They improve the traditional parts and service business. "I'm a data geek when it comes to the connected vehicle data and what it can do for both Ford, but more importantly, the customer," says Travis Hunt, Pro general manager of parts and service transformation.
Hunt says the word "transformation" was added to his title to demonstrate that typical parts and service business was changing thanks to data, which can improve parts inventory management, reduce service lead times, and lead to better preventive maintenance practices.
Combining connectivity, subscription sales, and service is meant to create a less-cyclical business with operating-profit growth at a midteens percentage annual rate for the coming few years. Not bad, but not Ferrari, which grew operating profit about 17% a year on average for the past decade. Wall Street expects Ferrari to show about 11% average annual growth for the coming few years, according to FactSet. Pro can put up results like that if Ford hits its goals.
The big difference between Ferrari and Ford Pro boils down to valuation.
Morgan Stanley analyst Adam Jonas deserves the credit for making the original Pro/Ferrari comparison. "I remember a time when Fiat owned Ferrari, and I had a valuation of about $4 billion on it," Jonas told Ford management on their fourth-quarter earnings conference call in February. "Now Ferrari is worth $80 billion today, and the business was totally ignored by investors when it was part of Fiat."
Investors had the data, however. Fiat-Chrysler reported Ferrari sales and earnings separately. The Ferrari catalyst was when it was spun off in 2016, which allowed new, nonautomotive, investors to look at shares.
Post-spin, Ferrari shares have gained about 26% a year on average. The stock now fetches roughly 50 times estimated 2024 earnings.
Pro isn't likely to fetch that multiple. And it isn't likely to be spun off, either, but it is bigger. Ferrari amounted to about 3% of Fiat sales in 2014. Pro was about 33% of Ford's total sales in 2023. Size gives Pro a fighting chance to get some additional credit from investors.
How much credit remains an open debate. If Ford Pro traded like an average industrial business in the S&P 500 it would be worth some $120 billion. Ford's market value today is about $50 billion.
Seems impossible, but Jonas didn't see a 20-times gain for Ferrari when it was part of Fiat.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 23, 2024 07:46 ET (11:46 GMT)
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