American automaker Ford reported a Q2 earnings beat, with CEO Jim Farley highlighting the timeline for increased EV adoption and lowered price pressures on electric vehicles in the earnings call. Tom Narayan, RBC Capital Markets Lead Equity Analyst — Global Autos, breaks down the performance of Ford's business segments, including its push for EVs. Narayan goes on to explain the impact that a looming UAW strike could have on American automakers.

This post was written by Luke Carberry Mogan.

Video Transcript

AKIKO FUJITA: Let's bring in Tom Narayan, RBC Capital Markets Lead Equity Analyst for Global Autos.

Looking at some of the comments coming through here, Jim Farley saying that the shift to this digital experience is a breakthrough EV is underway, but it's going to be volatile.

And it certainly has been, whether we're talking about cuts that have come through where the company has said we need a new skill set, looking at the company trying to compete in increasingly crowded space when it comes to EVs.

What stood out to you in the numbers that we got so far?

TOM NARAYAN: Yeah.

I mean, really when I look at Ford's results, I really compare it to what happened at GM, right?

Everybody's focused on, like, you pointed out, the 2023 number.

And everybody cares about is the EBIT number.

They raised that from 9 to 11 billion to 10 to 12 billion.

So pretty decent raise in that.

Now, with that the consensus analysts like me were already at like 10.8 billion.

So really it only goes up by maybe about 400 million, but that's still positive news.

Now, what we saw from GM is that stock actually sold off even though they raised numbers.

So it'd be interesting to see like you said what they say on the call.

If you dig into the numbers, definitely good margins out of especially the blue segment and pro especially.

The EV segment though, did post lower margins than were than the consensus expected.

But Jim Farley pointed out in the last quarter's call and in other interviews that this is going to be a segment that's going to take a while for costs to come down.

I think they said contribution margin break even by year end, and then maybe margin accretive at the end of 2024.

So everything here seems to be consistent with what the companies wants and has said.

The only issue is where expectations coming into the print already, you know, including all this.

You said the stock's up 2% after hours.

So maybe there is some more upside here.

SEANA SMITH: Tom, how are you looking at just the slowing EV sales growth because within this release, you mentioned the fact that Ford Model E's, first generation electric vehicles revenue there, it did increase 39% in the second quarter sequentially.

Revenue more than doubled.

But Farley did point out, Jim Farley CEO there, pointing out that near term pace of EV adoption will be a little slower than expected.

He's framing it that that's actually going to benefit some of the first movers within the space like Ford.

Do you agree with that?

TOM NARAYAN: Oh, yeah.

I mean, also you look at where Ford really is, right?

Ford's powerhouse is pro.

It's more North American-exposed.

It's less internationally-exposed.

So EV adoption North America is probably slower than it is right for Europe or China.

So if EV adoption is slow, it probably benefits a company like Ford.

That's more North America-exposed.

But in the long run, though, you know, '24, '25, I do see EV adoption pick up.

So it's something that they're going to have to find an answer for eventually.

AKIKO FUJITA: Tom, what is this stock ultimately trade on?

I mean, everything you said is that when it comes to EVs, as with many other companies, this is a transition.

It's a process.

You look at the broader market we're still at 5% of the car market.

So is it ultimately valued off of what they're generating on their gas-powered cars?

And how should investors be looking at the EV side of things, given the heavy investments that need to go in first in order for the returns to come?

TOM NARAYAN: Yeah.

I think you have to look at forward in different parts, right?

You have to look at the blue segment, which is its ICE business, its pro segment, which is its best business.

And then this EV business, you have to kind of look at it differently, maybe value it on a multiple of sales, right, because it's so forward-looking.

So when you separate these businesses and add them together, it's kind of I think how we think you should be looking at this business.

But ultimately, I think investors, when they look at this whole group, are really focused on two things.

One is the strike coming, potentially coming up in September.

And I do think that could weigh on shares, as it did on GM.

The second thing is people are going to be looking at pricing, right?

Pricing is at all-time highs across the group.

You see it in these numbers.

There's a downshift that's included and implied in this guidance in H2.

We also heard that from other companies.

Volkswagen reported this morning said the same thing.

GM said the same thing.

So H2 downshift coming as pricing comes down.

So a lot of folks are definitely concerned about if pricing falls, have we already had peak earnings?

And then like I said before, the strike potential impact on that is a big topic.

SEANA SMITH: Yeah.

Tom, what do you think that potential impact could look like here?

Because at least from the UAW side, they're not backing down.

The president there saying that strike is very much a potential outcome if their needs or their wants are not met.

So what does that mean then for Ford?

TOM NARAYAN: Yeah.

I mean, this is really why I think a lot of folks didn't get buy-in to what happened-- with GM's big beat is they were thinking, should I just wait maybe until we find out what happens with the strike?

If you remember in 2019, GM took a hit of $3.6 billion on EBIT.

That is huge.

Now, people are thinking maybe there'll be some strike fatigue at GM and maybe they'll come out OK this time around.

Ford from what we're hearing has good relations with the unions.

So maybe they won't do as badly.

And as we've heard Stellantis may be the one that could, again, hit this time around.

But it's anybody's guess.

But ultimately, what we saw from 2019, if that does happen again, I mean, all of these guys could get hit pretty hard.

And it's a question of whether or not investors look past it and just say this is a one time thing, or do they wait until we see what happens before getting involved in these names?

AKIKO FUJITA: Yeah.

A huge cloud hanging over a lot of these carmakers right now with those negotiations ongoing.

Tom Narayan, it's good to talk to you today.

Really appreciate the time.