A Ford Motor plant.
Courtesy Ford
Ford Motor stock is rising in early Friday trading after Bloomberg reported the company might spin off its electric-vehicle business. This isn’t the first report of a spinoff, and it won’t be the last, but automotive investors should approach reports with skepticism.
Ford (ticker: F) stock is up 3.9% to $18.22. The S&P 500 and Dow Jones Industrial Average are down 0.5% and 0.4%, respectively.
Ford said it doesn’t comment on speculation, but included a prior statement, “We have no plans to spin off our battery electric-vehicle business or our traditional ICE business.” ICE is short for internal-combustion engine, and industry jargon for the traditional gasoline-powered car business.
“Highly unlikely but you always have to explore,” Benchmark analyst Mike Ward tells Barron’s, regarding the rumored spinoff. “Unions, dealers, R&D assets, and manufacturing footprint are the biggest hurdles.”
The idea to separate legacy gasoline-powered vehicle operations from battery-powered vehicle operations has been around for a while.
The starting point for almost any discussion of a break up is valuation. Tesla (TSLA) is the world’s largest battery EVs, and the world’s most valuable car company. Shares trade for roughly 11 times estimated 2022 sales, while Ford and General Motors (GM) stock trade for about 0.5 times sales.
Tesla, of course, is growing much faster than legacy auto makers. Tesla’s delivery volumes grew 87% in 2021, and volumes are expected to grow about 50% in 2022, with total deliveries topping 1.4 million units.
The valuation gap between EV makers and established auto giants creates a competitive advantage for Tesla. A new plant to produce vehicles costs roughly 0.2% of Tesla’s market capitalization, while a new plant for Ford or GM costs more like 3% of their market caps, so it’s cheaper for Tesla to grow. The cost of capital advantage was cited by Wall Street analysts as far back as 2020.
It’s difficult to separate car businesses though. There are legacy pension liabilities along with the other hurdles Ward pointed out. Michael Burry, of The Big Short, suggested GM and Ford could issue tracking stocks to solve the spinoff difficulties. Tracking stocks give investors exposure to profits and growth from part of a business while the business remains part of the larger entity. GM has issued tracking stocks in its past.
The problem for investors, and auto-management teams, is what will happen to the valuation of the legacy-car business if its separated from the EV business. Shares of coal producer Peabody Energy (BTU) trade for 3 times estimated 2022 earnings. Investors believe the coal volumes will decline over time and that declining volumes will hit earnings down the road.
GM and Ford stock trade for about seven and nine times estimated earnings, respectively. That’s somewhere between Peabody and the about 20 times for S&P 500 stocks.
As long as the valuation gap exists between legacy auto makers and EV-only auto makers, spinoff speculation will persist. For now, it’s only speculation. Anything is possible, in theory, but executing a spinoff would be a very tall order.
Write to Al Root at [email protected]
