In the 2019 film Ford v. Ferrari— a true story set in the 1960s—a stodgy Ford Motor Company, desperate to appeal to a new generation of thrill-seeking young drivers, took up a challenge to beat Ferrari at the legendary Le Mans, a 24-hour race considered to be the most prestigious indicator of car-building and racing prowess. Ferrari’s reputation as the perennial winner of Le Mans made Ford’s lumbering and bureaucracy-laden attempt seem absurd and fated for certain humiliation.
A Ford win in the 1960s seemed as ridiculous then as the chances today that Ford Motor Company (F) shares would outperform those of Ferrari N.V. (RACE). One indicator: over the past five years, Ford shares have fallen by nearly 50%, while Ferrari shares have more than tripled since their October 2015 IPO.
What would it take for Ford stock to become competitive with Ferrari stock?
Ford vs. Ferrari in the Stock Market
Ferrari clearly has some impressive advantages. First, Ferrari is perhaps the most desired sports car on the market – the brand itself is synonymous with super-elite performance and styling. Its cars sell for an average of $300,000 each, among the highest in the industry. Its appeal to wealthy individuals has generally insulated the company from the financial impact of the pandemic-driven recession.
In terms of numbers, Ferrari’s revenues have grown at a 5-10% clip for years, and this pace appears likely to continue. Cash operating profit margins, at about 24%, might be enviable at many technology companies. And the company has a sturdy balance sheet, with its modest $3.3 billion in debt partly offset by about $1.3 billion in cash.
Ford, on the other hand, has struggled for years with lackluster revenue growth. Hard-hit by the pandemic, revenues may not return to 2019’s pace for another three years, and Ford will likely post only 1-3% annual growth beyond that. In a good year, Ford’s cash operating profits margins may reach 9-10%. Although its F-Series pickup trucks have the #1 market share in the United States, no one would consider Ford to be a highly-desirable brand. And, with its average vehicle price of about $29,000, “elite” doesn’t quite sound right.
Ford’s balance sheet is reasonably sturdy but not pristine. While its auto-lending arm, Ford Credit, has so far escaped meaningful recession-related damage, the credit cycle has not yet fully played out.
The Critical Advantage Ford Has
However, Ford stock has a critical advantage over Ferrari stock – the blessing of low expectations. Ford shares sell at only 7x estimated 2022 earnings and a very humble 3x Enterprise Value/cash operating profits. Ferrari shares, on the other hand, trade at 39x estimated 2022 earnings and nearly 18x EV/cash operating profits.
Adding to Ford’s edge are signs that the company is emerging from the stagnation induced by its ineffective and buzzword-laden strategy. On October 1, Jim Farley will take the helm as CEO, initiating what we believe will be a product-led and market-savvy approach to reviving Ford. Farley brings deep auto-industry operating and leadership experience, having progressed from heading several regions to currently overseeing all of Ford’s global operations.
Perhaps unique among top auto executives, he has nearly 20 years of experience working for a competitor (the highly regarded Toyota Motor Company (TM)), where he led their Lexus brand and had senior marketing and sales roles – skills that Ford clearly needs. Recruited to Ford in 2007 by then-CEO Alan Mullaly, who saved the company from bankruptcy (a fate not shared by its two Detroit competitors), Farley is widely known as a passionate and execution-focused “car guy.”
Ford’s pace of change is already accelerating. The company recently announced new all-electric varieties of its F-Series trucks and a large round of lay-offs to cut its operating costs. We see potential for many additional major improvements, including exits from chronically unprofitable overseas operations. Also, Ford can make significant changes to its domestic operations that can expand its margins and step up its pace of innovation with newer technologies. These changes would boost Ford’s cash flow and help it bolster its Ford Credit operations.
It wouldn’t take much to re-ignite the currently dim investor interest in Ford shares – and the powerful catalyst is soon to be in place. Ferrari stock, however, already assumes a prosperous future. Any stumbles along the way, including the chances of weak execution from its upcoming SUV launch or its efforts to introduce electric vehicles, or even the brand erosion that either of these might produce, could weigh on Ferrari’s valuation.
The actual 2020 24 Heures du Mans race had Toyota winning for the third consecutive year. Unlike car racing, Ford doesn’t have to beat Ferrari in any metric other than stock performance. Whose shares will win this competition? We’re placing our bets on Ford stock.