Ford Motor Company (F, Financial) announced on July 17 that it is slashing the prices of F-150 Lightning electric trucks, which was met with a 5% decline in its stock price as investors weighed the impact of these price cuts on the profitability of the company. The F-150 Lightning Pro will now cost $49,995, a 16.6% decrease from the maximum retail sales price of $59,974 in the past. Prices of other variants of the electric truck such as XLT 312A Extended Range and Platinum have also been reduced.
For context, the Pro model, at the time of its launch in May 2022, was priced at $39,974. After a year of continued price hikes for its electric trucks, Ford is now adapting a strategy similar to the luxury electric car market leader Tesla Inc. (TSLA, Financial). In the first four months of 2023, Tesla slashed prices of its Model Y and Model 3 vehicles six times, raising concerns about the company's profit margins and worsening industry conditions.
Unlike Tesla, Ford remains cheaply valued on an absolute basis with a price-earnings ratio of just 19.76, but investors will have to closely monitor how recent price cuts will impact the profitability of the company.
The potential impact of price cuts
To fully understand the impact of Ford’s price cuts, investors will have to wait for third and fourth-quarter earnings reports. However, we can potentially gain some insight by thinking about the reasoning behind price cuts. Ford, when announcing the price cuts, highlighted several reasons behind this decision, including its increased production capacity, declining cost of production and declining battery raw material costs. With the Rogue EV Center in Michigan nearing the completion of planned upgrades, the company believes the production capacity at this plant will triple to an annual production run rate of 150,000 F-150 Lightning trucks by fall this year.
Commenting on the price cuts, Ford Model e’s Chief Customer Officer Marin Gjaja said:
"Shortly after launching the F-150 Lightning, rapidly rising material costs, supply constraints and other factors drove up the cost of the EV truck for Ford and our customers. We’ve continued to work in the background to improve accessibility and affordability to help to lower prices for our customers and shorten the wait times for their new F-150 Lightning."
Going by the reasoning provided by Ford, it seems as if the company can afford to reduce the prices of EV trucks without taking a hit on profit margins. Under normal market conditions, lower prices should also encourage more potential buyers to pull the trigger.
Early results from Tesla’s price cuts show that in the second quarter of 2023, Tesla delivered 466,000 vehicles, surpassing the 455,000 expected by analysts. This represents a 10% increase from the vehicle deliveries reported in the first quarter and a staggering 83% year-over-year increase. Commenting on this strong performance, Wedbush Securities analyst Dan Ives said:
"The price cuts were a smart poker move for Tesla and are paying major dividends in the field, especially for the China market. Tesla continues to play chess while other electric vehicle players are playing checkers and this was another trophy case quarter for Musk and co."
The promising results in the second quarter have prompted Tesla to set an ambitious target to grow deliveries by 50% this year. Thus, I believe that as the U.S.'s number one truck maker, Ford is well-positioned to use price cuts to drive volume growth. If Tesla's results are anything to go buy, demand for EVs remains strong, which would mean price cuts could boost volume for Ford as well.
However, if the American economy enters a long and painful recession in the near future, Ford is highly unlikely to reap the rewards of this strategic move. This is a risk that needs to be actively monitored.
On the profitability side, price cuts (if not accompanied by sufficient demand increases) could push Ford’s EV business unit into further losses, at least in the short term. In the first quarter, Ford Model e, the company’s EV business unit, actually reported an operating loss of $700 million on an Ebit margin of -102.1%. In the fourth quarter of 2022, the Ebit margin stood at -40.4%, which highlights the substantial deterioration of profitability in the first quarter. These results highlight that Ford’s EV business is nowhere near profitability today, and further price cuts will at best help the company maintain the current level of losses unless demand improves meaningfully to help Ford benefit from scale advantages.
Ford is trying to grab a bigger share of the EV market with price cuts even at the expense of short-term profitability. The company is home to the best-selling trucks in the U.S., and it has drawn plans to electrify its fleet of trucks in the coming years. With a competitive pricing strategy, I believe Ford will be able to leverage its popularity among American truck buyers to gain sufficient scale to turn the EV division profitable eventually, but it's definitely not as attractive as Tesla's current profitability.
Attractive valuation
Even though Ford has made steady progress in the last few years to embrace EVs, the market is still valuing the company as a traditional automaker with little growth prospects. Ford is valued at a forward price-earnings ratio of 7.5. In comparison, Tesla is valued at a forward price-earnings ratio of 82 as investors have pushed Tesla's stock price higher. As Ford goes more electric, I believe the valuation disparity between Ford and Tesla is likely to improve in favor of Ford.
Ford’s recently announced EV price cuts will hurt the company’s profit margins in the short run, but this decision seems prudent from a long-term perspective in my opinion as the company needs to aggressively grow its EV market shrare.
