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Ford earnings: ‘Farley is pushing this company faster and farther’ toward EVs, analyst says

Bank of America Global Research Senior Automotive Analyst John Murphy joins Yahoo Finance Live to discuss fourth quarter earnings for Ford, the future of EVs, and the outlook for the auto market.

Video Transcript


BRIAN SOZZI: Ford shares are on the move lower after a worse than expected quarter. And the ticker is the third hottest ticker on the "Yahoo Finance" platform right now. Let's dive into this Ford report and the auto industry more broadly with John Murphy, Senior Auto Analyst at BFA Global Research. John, always nice to get some time with you. Market is not liking this Ford quarter, they missed on earnings, had some cautionary things to say about first quarter production, but they did give an optimistic profit outlook for the balance of this year. Do you think that's just too optimistic, given where things stand in the semiconductor industry?

JOHN MURPHY: Well, Brian, thanks for having me. I think when you look at the fourth quarter, I mean, there was a little bit of a miss on volumes, higher raw material costs, and hiccups there that explain what was going on in the fourth quarter. But I think the outlook for full year 2022 is very, very encouraging. $11.5 billion to $12.5 billion in EV is a pretty big step up from what they did in 2021.

And I think as you look at that in the context of that, you're also investing very aggressively for the future. I mean, Farley is pushing this company faster and farther than it had been before towards EVs and in the future car. So I do think that the market overreaction right now is really an overreaction and really the company is moving in the right direction. And in 2022, the numbers will improve quite dramatically after we get through the supply chain hiccup early in the year.

JULIE HYMAN: Hey, John. It's Julie here. And yet, it does seem like there was at the very least some sort of communication breakdown here between the street and the company. When you get a miss of that magnitude last quarter, what did the company not communicate well in terms of what was going on during that quarter?

JOHN MURPHY: Yeah, it's a good question. I think when we look at this, there were a lot closer our numbers. They did miss our numbers a bit, but I think people have been way too optimistic, given the guidance Ford had talked about in the third quarter. So I think people had gotten a little bit more optimistic about where volume was going to go, ultimately relative to what Ford is talking about.

And there's a lot of puts and takes in what's going on in the supply chain right now and different products that are disrupted in different ways. I think in defense of the way that Ford communicated, I do think that people got a little bit ahead of the volume expectations more than they should have based on other sources. There's a lot of other industry sources out there, they're not as accurate as what the companies are talking about right now.

So there was, I mean, maybe fortune had been a little bit more aggressive in reiterating that over the course of the quarter, but I don't think there's necessarily a real breakdown like we've seen in the past from other companies in outlook versus expectations going forward. I do think this was a hiccup in the short term that'll be remedied very quickly.

BRIAN SOZZI: These new electric vehicles from Ford, John, the F-150 Lightning, the Mustang Mach-E, even the new E-Transit Transit Electric Van. How profitable are they?

JOHN MURPHY: Well, in the near term, they are profitable. The F-150 is sharing some components, the F-150 Lightning with the original F-150, so there is some benefit on a variable basis that they're getting from the F-150 Lightning. The Mach-E on a unit economic basis is probably profitable at this point.

So over time, I think you're going to be looking at products that are as profitable, if not more profitable, than the outgoing ice product. That's going to take some time, you're going to have to drive battery costs down, and have to drive scale up. But the profit opportunity is at least the same, if not greater, over time on EVs. It's going to take some time, but I think the transition is going to be pretty good for Ford and probably for the rest of the industry over time.

BRIAN SOZZI: I got this question from a user, and perhaps you can answer it for us. General Motors shares. Now, they have really badly underperformed for the past year or so. Now, GM has come out with a lot of high profile investments in EVs, they seem to be moving aggressively into EVs. What is wrong? Is there something wrong with their messaging? How come they can't drive that excitement that Ford seems to be driving?

JOHN MURPHY: Well GM for the better part of the last five years has been well ahead of Ford. And Ford is catching up quickly under the auspices of Farley's leadership. So there is definitely a significant change and catch up on Ford being sort of left behind by GM and Ford finally catching up.

Both of these stocks in auto parlay have always been viewed by some very extreme skeptics as being zeros as terminal values over time. But what happened with GM over the course of the last five years is they proved that they're going to play in the future. Ultimately, where they will be is still a big question mark, and that concern really lingered for Ford longer than it did for GM.

But now that Ford is putting up a full year basis and a reality for 2022, pretty good results, and moving forward on EVs very quickly and on the EV future, I think people are understanding that probability of it being a 0 is now off the table like it was at GM in the past couple of years. And Ford stock is now catching up for it.

I mean, the valuation on these stocks is still way under where it should be, at least in my opinion. So I think the garbage multiples these names used to trade at are probably, hopefully, a thing of the past. And as people understand, they're going to have some bright future, debatable exactly where they land. You can really start to own these things for the future and not just for current cash flow.

JULIE HYMAN: John, when we talk about the future, big picture for these companies is who wins on EVs going to be the most important factor for these companies? And if that's so, who is going to win on EVs? And, obviously, we got to throw Tesla into that discussion as well.

JOHN MURPHY: So I think there's two dimensions as to where the future will go. First is on EVs. And that's a good question, Julie. When we look at our product pipeline analysis that we do in Car Wars each year, we're expecting the bulk of the market, I mean, better than half of the vehicles that are going to be launched in 2022 calendar year to be EV. So 29 new EV launches. A lot of those are coming from GM and Ford and other companies.

But when we look at the next three years beyond that, GM and Ford really dominate. And I think as you look at this, their market shares on EVs are around 5% or 6% right now. In the course of the next three years, we expect them to be in the 15% range, plus or minus.

At the same time, the rest of the industry is catching up as well to Tesla. And we expect Tesla's market share to drop from about 70% in EVs to about 20% in the next three years. So they're really gaining the bulk of the market share that we expect Tesla to lose.

But I think the second thing that's really important here is that in some ways, the powertrain transition towards EVs is just that, the industry, and you have to find ways to make more money off of these vehicles over time. So connectivity is going to be very important. And I think when you look at both GM and Ford, they were very focused on that.

And who's going to win from a profit standpoint is really important. How much money can you make on these vehicles at the point of sale, in service, on the second, third, fourth, fifth owner, and that connectivity to the vehicle, much like an iPhone, opens up opportunity to connect to these consumers through the asset itself, participate in many more transactions, sale of the vehicle, than also over a lifetime service of that vehicle.

Sort of the iceberg of profit opportunity that's always been there sort of underneath the surface that the industry hasn't been able to get to. So with a connected EV, you can do a whole lot more with the consumer and stay connected to them over time. And GM and Ford really are focused on this.

JULIE HYMAN: Not to mention fixed things like that your chime doesn't sound when you don't buckle your seatbelt. You can fix that remotely, like Tesla just discovered. John Murphy, good to see you. Thanks so much. Senior Automotive Analyst at Bank of America Global Research. Talked to us about the autos today.