Cars are becoming more like phones — once simple consumer products packed with software — a shift that promises substantial returns for automakers’ stocks.
Automakers want to make the case to investors that software is a big part of their future as cars become smarter and more sophisticated. “The possibilities for a software-assisted experience are bigger than I think anyone can understand,” says Ted Kanis, who runs Ford’s business that sells vehicles to automotive companies.
Ford Pro, the business segment, will begin reporting results separately in early 2023. The results were eye-opening for investors.
Ford Pro reported operating profit 2.4 billion dollars In the second quarter, beating the traditional car business by 100 million dollars. Operating profit margins were 15.3% in the quarter, better than the 9.2% margins Ford earned from selling cars through dealers.
He sees cars becoming more connected to the internet, profit margins going up and sales cycles slowing down. “We had 450,000 paid subscribers in the second quarter,” Kanis says, which is up 60% year over year. They are from Ford. 125,000 business customers 140,000 in the US and Europe.
Subscriptions include internet connectivity and on-demand reports as a service or when vehicles are in frequent use – tools that help companies get the most out of their fleets at low cost.
Canis wants 20% of Ford Pro sales to come from parts and service, a category that includes subscription sales, by 2026. This is higher than the percentage in the mid-teens today.
At 20%, Ford Pro’s earnings statement might sound a bit like Apple’s. When Apple introduced the iPhone in 2007, services like the Apple Music Store were considered. approximately 10% Sales. Reporting structures have changed over time, but equivalent services are considered About 20% Sales in fiscal year 2022.
The growth of services has created a lot of value.
Apple
(AAPL) shareholders. Not only are sales and earnings up, but Apple stock is trading at about 29 times expected earnings per share over the next 12 months. When the iPhone came in, the multiplier was nearly 15 times.
Tesla ( TSLA ) stock, meanwhile, trades at about 60 times earnings. Increasing sales of electric vehicles will account for that, but the potential for software sales is also important.
CEO Elon Musk is making a big bet that people will pay month-to-month to use his self-driving software. That would create an unprecedented aftermarket revenue stream for the industry.
Ford stock, meanwhile, trades for about six times earnings. It’s a stretch to think that Ford could be another Apple or Tesla, but Kanis is content to treat it as just another manufacturing stock. Canis “John Deere” shows the potential for Ford. “They have heavy industrial equipment, a huge software and services business… and salespeople.
Deere ( DE ) has been touting the benefits of connectivity for longer than Ford. The goal is for recurring revenue to account for 10% of sales by 2030, not counting parts. Including parts and financial services, Deere believes that 40% of total sales will be recurring and operating profit will be 20%. According to FactSet, the average figure for the past five years was about 16 percent.
Deer stock trades at roughly 12.5 times trailing 12-month earnings: less than Apple, but much better than Ford. The price/earnings ratio has averaged about 16 times over the past few years.
Car investors will probably enjoy that multiple.
Ford stock does not yet trade as a software stock. Shares are down 20% in the past year,
S&P 500
And
Dow Jones Industrial Average
They increased by 15 percent and 12 percent. Rising interest rates and falling car prices are weighing on investor sentiment.
Write to Al Root at [email protected]
