Earlier this month, iconic automaker Ford Motor Company (NYSE:F) unveiled an ambitious cost-cutting plan in addition to laying out its plan to at least partially pivot to more SUVs and more electric vehicles. F stock jumped on the news, of course, because, well, anything would be an improvement for the beleaguered company.
What’s not been well studied, however, is the plausibility of these cost-paring goals, and what the potential impact might be on the carmaker’s books.
With that as the backdrop, here’s a closer look at where Ford is in terms of its expenses, versus where it wants to be.
Exciting Cost-Cutting Plans
The short version of a long story: Ford CEO Jim Hackett is looking to cut $14 billion worth of annual spending out of Ford’s budget.
The slightly-less-short version: Of the $14 billion, $10 billion will be saved by doing things that lower Ford’s cost of materials and the other $4 billion will be trimmed by reduced spending on engineering, for starters. The former will require its suppliers, at least in part, to work with Ford Motor in a more generous way, though redesigned automobiles that require less material will also play a role in reaching this goal. The latter will mean, among other things, reducing new car development times by 20%.
Ford also intends to focus less on passenger cars and more on trucks and SUVs (which boast better margins), while ramping up its work on self-driving and battery-powered cars, where it woefully lags rivals like General Motors Company (NYSE:GM) and Tesla Inc (NASDAQ:TSLA).
It all sounds really, really good to current and would-be owners of F stock. Unfortunately, the plan is so ambitions it may be downright unachievable. Never even mind the potential damage to the marketability of its cars that could surface as a result of the tightened purse strings.
A Tall Order
How much is $14 billion for Ford? To a company that sports a top line of $153.6 billion for the past four cumulative quarters, culling $14 billion worth of costs seems superficially reasonable.
It may not be as easy as one might think, though.
Over the course of the past year, Ford reported a cost of sales total of $139.0 billion. A fair chunk of that is made up of building and maintenance costs, line workers, engineers and, of course, the car parts and materials used in the assembly of an automobile. While $14 billion is only about 10% of the company’s cost of goods sold, it may be anything but easy to find a way to reduce the actual cost of the materials that go into a car by something on the order of 20% (when all is said and done).
There’s also the not-so-small matter of rising commodity costs and rising wages.
It’s a choppy increase to be sure, but the cost of iron has been steadily rising since early 2016, ramping up from a low of less than $40 per ton then to more than $60 now. Prices for aluminum, which is an increasingly popular material used in car bodies, are on the rise as well, with no end to that rally in sight.
Ford’s suppliers aren’t simply going to move into the red because Hackett needs a price break.
At the same time, like him or not, it’s difficult to deny that President Trump’s pro-business push — and his pro-wage agenda in particular — isn’t taking hold. Last month’s average hourly pay rate was up 2.9% year-over-year, which was the strongest single monthly gain since 2009. That expense is only apt to swell going forward, presuming the economy remains in growth mode.
In that light, Hackett’s plans are not only lofty to the point of feeling out of reach, he’s fighting a headwind.
Bottom Line for F Stock
Don’t misunderstand, a penny saved is a penny earned, and there’s little doubt Ford is incurring some expenses it simply doesn’t have to — that’s true for any large corporation. Culling $14 billion worth of spending for a relatively streamlined outfit like Ford, however, is easy to say and tough to do.
There’s also the concern that in cutting costs, Hackett may be crimping marketability. For instance, a Ford Fusion comes in 35,000 variations when factoring in all the different powertrains, features and color choices. To save money, Ford aims to bring the various versions down to only 96 different possibilities. Nomura analysts noted that “… cutting the number of orderable options and focusing on upmarket trims would also shrink the addressable market for Ford, and likely lead to market share losses.”
Nomura still broadly likes the idea of cost control, but makes a valid point — for every action there’s an equal and opposite reaction. And, though most consumers wouldn’t likely balk at (or even notice) fewer customization options for the Fusion, it’s the unknown and unforeseeable adverse response to other spending that’s going away that could take an unexpected toll on the top line and hurt F stock.
Is this a reason to steer clear of or sell F stock? No, we’re not quite to that point yet. It is a reason to keep a cautious eye on Ford though.
It’s easy to say things. Actually doing them is a lot more difficult.
As of this writing, James Brumley held a long position in Ford Motor Co. You can follow him on Twitter.
