Ford (F) : The Tesla of Pickups

scarcity in new and used vehicles is bringing fatter margins to car makers, in particular Ford.

The business of making things – not virtual things, but real things made by traditional manufacturers – is suddenly brisk. So while pandemic-induced production freezes in durable goods cratered output, forecasters say demand was surprisingly steady. That meant, the washers, furnishings, and ready-made concrete blocks still in the supply chain fetched record prices. 

Seemingly in a single quarter, manufacturers felt something they’ve not felt since the mid-20th century: Leverage with customers to boost margins. And that very much includes the margin resistant automotive industry. 

Like most of the rest of the global economy, the auto industry slammed on the parking break in the past year. In April 2020, for example, Maruti Suzuki, India’s largest car maker, struggled to sell a single car. Domestic used vehicle dealer auctions were deemed as non-essential services and were also shuttered. 

A sitting president, Donald Trump, had to wait until 2021 to finally auction off his used Ferrari F430. 

According to sources in the automotive ecosystem, as car sale channels opened back up later in the year, new and used vehicles commanded once unimaginable premiums. The country’s largest car dealer, AutoNation (AN), for example, basically saw operating cash double year-over-year, with essentially no change in operating efficiencies whatsoever. 

As one dealer told us, AutoNation was merely lucky enough to have cars sitting on its lots. 

And used car dealerships also saw rich margins. Again, with no major change in operational posture, once down-scale used-car operations like Sonic Automotive (SAH) saw cash from operations jump from a loss of $25.6 million in the third quarter of 2019, to a $279 million gain in the same period in 2020. Again, intelligent robots are not needed. Sonic had cars. They sold them at higher prices. Period. 

But as free money tends to do, investors took notice. Car dealer groups like AutoNation and Penske Automotive (PAG) became sexy stock-picker darlings in the Covid recovery. Rapidly, the “value” story in those operations faded. But higher margins flowing to the companies that manufacture those cars and trucks beg a deeper question:

What indeed does a 21st-century car maker – which sells fewer vehicles but at far higher prices – look like? Which leads us to Ford, one of our favorite downtrodden industrial stories. 

Ford makes as many lucrative pickup trucks as they can sell. Something on the order of 225,000 units came off its lines in the 4th quarter of 2020, and at record margins. Reported net cash from operating activities essentially doubled. And when the resources needed to make that money, like capital spending, are taken into account, a back-of-the-envelope free-ish cash flow story is revealed.

Ford’s productivity jumps off the starting line. Yet here’s a stock trading at around $9.00, basically at pre-pandemic levels, but operating with dramatically higher margins.

Risky Ride

The valuation mismatch with Ford is easy to explain. Here is a company that tends to lose money. The margins on its operations often run in negative territory. And it’s return on invested capital can hover around the inflation rate, if not lower. Then there’s the scary fact that Ford won’t be a car maker much longer. The automotive segment is essentially being closed to focus on lucrative trucks and Mustangs. 

But still, Ford still makes trucks. Lots of them. And for the foreseeable future, it will make those truck at margins that were once only dreamed about. It’s hard to see how Ford’s prospects are anything but suddenly optimistic. 

Because as one car dealer in Michigan told us. “We sell trucks to teachers now.”