Ford surges on energy business while US car buying remains slow

Ford's (F) plans for a new energy storage business have sent the automaker's stock soaring.

RBC Capital Markets lead equity analyst Tom Narayan reacts to what this may mean for the auto company while US car buying remains stilted since the pandemic.

Video Transcript

00:00 Speaker A

Ford is looking to capitalize on the AI boom with the launch of its new energy storage business. That has sent those shares soaring. May May, the month of May marked the best month since the financial crisis.

00:15 Speaker B

Based on what we know, they're selling basically um battery capacity that we're going to use for EVs that they're not or battery storage. and based on that capacity, 20 gigawatt hours, we estimate the total value is could be anywhere between 1 to 5 billion of market cap value for Ford.

00:40 Speaker B

And as we know, based on how the stock has moved, it's up about 20 billion in market cap. So, we do wonder how much this stock movement is really based on fundamentals.

00:46 Speaker A

The backdrop is we're looking at a slowing auto sales environment. Just not necessarily with Ford, just like everything, right? Um, the Wall Street Journal recently putting out a story saying like it was 17 million on an annual basis pretty consistently. Now we've gone down to around 16 million and most folks don't expect it to recover anytime soon.

01:10 Speaker B

But we do have to remember, there was a lot of pent-up demand. People didn't buy cars for several years after the pandemic. So there's still some support there uh to support auto sales. Um, in addition to that, look, car prices are really high.

01:31 Speaker A

Right. Yes.

01:32 Speaker B

So you have this like double whammy of super high car prices, but at the same time, people never bought cars and they're kind of really old. Um, and then you have this K-shaped economy uh dynamic happening, right? So at the lower end, people are probably buying used cars, but at the upper end, people are doing fine and they're able to afford cars. And what we're noticing is the car is not really a consumer discretionary purchase, right? It's not like going to McDonald's, like you got to get to work.

02:05 Speaker B

So you'll buy the car. So, we actually think there's going to be some sort support, but to your point, are we going to go back to 18 million a year, 19 million a year in the US or something like that? Probably not.

02:18 Speaker A

Does it make sense as an automaker to not just be in the auto business because the auto business is just okay?

02:27 Speaker B

Yeah, that's fair. And by the way, they're not the only ones, right? I mean, obviously Tesla, um there's there's an auto supplier Borg Warner, um there's um other companies like Aptiv that are going into things like, you know, robotics and defense sector. There's a company Dana that's uh getting out of the auto industry. So there's definitely a motivation to do that and and that's par for the course especially for these auto suppliers.

02:50 Speaker A

Do you think do you think that those are more, the ones that are do seeking that diversification, are they more attractive as a result of doing that?

02:59 Speaker B

Well, they're definitely seeing a lot of stock price appreciation, I'll tell you that. But I would just kind of note, you know, at the end of the day, the people with the spreadsheets do matter. And so when you do the math, it

03:10 Speaker A

Yes.

03:10 Speaker B

Yes.

03:17 Speaker B

there there there is another side to this, which are there are boring, let's say auto companies that are very interesting, even in this environment that are very cheap. And we're actually recommending folks take a look at those guys, um because, you know, it's easy to get caught up in kind of the the vibes as you pointed out. Um, there's a bigger issue I think that's happening than that, which is China. So how to play the impact of the Chinese threat to the auto industry, I think is more important for investors. And I think, believe it or not, there are some boring, quote-unquote, autos names that that that that are playable.

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