Will Ford’s scaled-back electric vehicle plans create value for investors?

Ford Motor Co (NYSE: F) is one of several automakers that have announced plans to reduce production of electric vehicles (EVs) or delay their introduction. The stock market reacted skeptically, with Ford shares losing almost 22% in the last year.

Over the past 12 months, Ford has been one of many automakers to announce ambitious targets for electric vehicle production. This perceived step back from electric vehicles is a consequence of market experience; demand for all-electric cars and trucks is lower than Ford projected. Rather than spend billions of dollars on a smaller-than-estimated and currently unprofitable market, Ford has decided to slow the adoption of electric vehicles without abandoning them altogether. Although the market has reacted negatively, Ford’s acceptance of the reality of the current market environment could be a catalyst for better financial results and stock returns.

The Ford+ strategy meets consumers where they are today

Ford announced the Ford+ initiative in 2021 and originally envisioned a prominent role for electric vehicles. The strategy, as most recently communicated, is now viewed by management as a mandate to provide consumers with vehicles on their terms, whether they are electric, combustion or hybrid. The plan also places an emphasis on commercial vehicle sales.

The company also expects its non-automotive sales business, including software-enabled services, to deliver growth in both revenue and profit. For the full year 2023, Ford reported 630,000 paid software subscriptions across all product lines. In its first-quarter 2024 earnings release, the company did not provide details on total subscription numbers, but noted that subscriptions for Ford Pro, its commercial segment, grew 43% year over year. The growth in subscriptions further validates Ford’s strategy as the company diversifies its revenue away from its traditional vehicle sales model.

Fundamental value of Ford shares

Aside from the strategic vision for the future, potential investors in Ford stock must evaluate whether Ford’s financial condition and operating metrics make the company an attractive investment. When evaluating Ford’s value, it is helpful to compare the company to its competitors. General Motors Co (NYSE:GM) Not only is Tesla a long-standing historical competitor, the company has also taken a different approach to electric vehicles than Ford, making it a good comparison candidate.

Data source: YCharts. GM had negative free cash flow in the comparable period.

The story goes on

At first glance, General Motors appears to offer more “value for the price” with a low single-digit price-to-earnings ratio. However, investors seeking value should look at Ford’s free cash flow and dividend strength. General Motors’ comparatively weaker free cash flow situation may be due to the company sticking more closely than Ford to its original, ambitious electric vehicle production goals.

In addition to the more attractive price-earnings ratio per share, Ford also pays a higher dividend. Both factors make Ford an attractive candidate for value-oriented investors.

The future of Ford for investors

While Ford currently has a better value than GM based on free cash flow and dividend yield, what about the future? As it adjusts its EV plans, Ford seems determined to make shareholders the beneficiaries of its updated strategy. In the company’s full-year 2023 earnings release, Ford stated a goal of returning 40% to 50% of adjusted free cash flow to shareholders, including paying additional dividends above the base dividend.

The divergence between General Motors and Ford in electric vehicle production makes Ford a natural choice for investors wary of the hype surrounding electric vehicles. Owning Ford stock also preserves the potential to profit from a future increase in electric vehicle usage if or when it occurs. Ford’s fundamental value relative to its traditional rival is another reason for investors to buy shares at current levels.

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Joseph Arroyo does not own any of the stocks mentioned. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.

Will Ford’s scaled-back electric car plans add value to investors? was originally published by The Motley Fool