This article explores Ford Motor (NYSE:F) several margins, including the gross margin, operating margin, and net profit margin.
Additionally, we will also look at Ford Motor’s margins by segment to find out which business sector, whether the automotive or the financial service sector, derives a higher margin.
Therefore, let’s take a look!
Ford Motor’s Business Segments
Ford Motor Company has several reportable segments but the company is made up of 2 major segments in general.
They are company-excluding Ford Credit and Ford Credit as shown in the snapshot above.
Company-excluding Ford Credit is made up of several segments, including Automotive, Mobility, and Corporate Other.
On the other hand, Ford Credit is the lending arm of the company and is a major subsidiary wholly owned by Ford Motor Company.
Ford Credit is responsible primarily for providing financial services, including extending loans and credits to retail buyers as well as commercial customers.
Ford’s Automotive Gross Margin
Let’s first look at Ford’s automotive gross margin for the period between fiscal 2017 and fiscal 2021.
Ford’s automotive gross margin provides information such as the company’s automotive gross profitability, and indirectly, the moat of its automotive business.
A high gross margin implies a bigger moat or a monopoly that a company has over its competitors, which can range from brand power to quality products that the company produces.
A wide moat provides a company with several advantages, including putting a higher price tag on its products, and this will lead to greater profitability.
That said, from a TTM standpoint, Ford’s automotive gross margin has been declining since fiscal 2017 and clocked in at only 2% in fiscal 2020 Q2 before recovering to about 6% in the latest quarter in fiscal 2021.
At this level of gross margin, Ford Automotive does not make much profit and would probably incur a loss after accounting for operating expenses.
In short, Ford’s automotive sector is a low-margin business.
Ford’s Company Excluding Ford Credit Operating Margin
For Ford’s company excluding Ford Credit, this business sector is made up of Ford Automotive, Mobility and Corporate and Others.
That said, Ford’s company excluding Ford Credit operating margin has been having the same downtrend as the automotive sector and has performed even worse than it.
As of fiscal 2021 1Q, Ford’s company excluding Ford Credit operating margin clocked in at slightly below -3%, one of the worst results the company has ever seen.
In its prime days back in fiscal 2017, Ford’s company excluding Ford Credit operating margin could reach as much as 2%.
However, Ford’s company excluding Ford Credit operating margin is in the negative region now, implying that the company is incurring an operating loss.
Again, at this level of operating margin, Ford’s company excluding Ford Credit is a low-margin business and has even incurred losses due to the negative margin.
The low profitability in this group is expected as Ford Automotive is the biggest component within the company excluding Ford Credit, contributing the largest revenue and profit.
Since Ford Automotive is a low-margin business and is the biggest component, it makes sense that the company excluding Ford Credit is also a low-margin operation.
Ford Credit’s Operating Margin
On the flipped side, Ford Credit is a highly profitable business, clocking in at an operating margin that averages more than 20%.
In fiscal 2021 Q1, Ford Credit’s operating margin reaches the highest level at more than 30%, a record for the company since fiscal 2017.
Despite being a high-margin business, Ford Credit’s operating margin still temporarily dipped to about 15% in fiscal 2020 2Q, possibly driven by the negative impact of COVID-19.
However, Ford Credit’s operating margin has quickly bounced back and even exceeded that of the pre-COVID levels, suggesting that Ford’s lending business is making even more money during the pandemic.
In short, Ford Credit is a high-margin business and makes tonnes of profits for the company even during the COVID age.
Ford’s Consolidated Operating Margin
Ford’s consolidated operating margin is the combination of operating margins of all Ford’s subsidiaries, including that of Ford Credit.
That said, Ford’s consolidated operating margin follows the same pattern as that of the company excluding Ford Credit.
This is so because the company excluding Ford Credit is the largest subsidiary, and is much bigger than Ford Credit.
While the consolidated operating margin may look similar to that of the company excluding Ford Credit, its operating margins are slightly higher.
For example, in fiscal 2021 Q1, Ford’s consolidated operating margin reached nearly 0%, much higher than the -3% seen in company excluding Ford Credit.
Despite having the advantage of Ford Credit, the consolidated operating margin was still mediocre, due largely to the pathetic result of Ford Automotive.
In short, Ford Automotive’s result is dragging down the result of the consolidated company.
Ford’s Company Excluding Ford Credit Net Profit Margin
Ford’s company excluding Ford Credit net profit margin is having a similar trend as the operating margin.
In this case, Ford managed to achieve a positive net profit margin of 1% in fiscal 2021 Q1, much higher than the -3% operating margin recorded in the same quarter for company excluding Ford Credit.
The higher net margin compared to the operating margin seen in all fiscal periods has been primarily driven by investment gains.
One such example was the $900 million unrealized gain arising from Ford’s investment in Rivian reported in fiscal 2021 1Q.
Keep in mind that these gains as a result of investment or fundings in companies may not be sustainable in the long term.
In general, these results are often a one-time event or twice the most in most instances.
One notable trend observed in Ford’s company net margin is the significant turnaround of the margin in the latest quarter compared to its prior lows.
In prior quarters, Ford’s company excluding Ford Credit has been having net losses consecutively for several quarters.
However, the losses have been narrowing in subsequent quarters and Ford was reporting a positive gain in the latest quarter.
Does that imply a looming turnaround for Ford Automotive?
Ford Credit’s Net Profit Margin
On the flipped side, Ford Credit has been reporting a net margin averaging more than 20% for the past 5 years.
Ford Credit’s high net profit margin illustrates that the subsidiary is a highly profitable business, roughly in line with what we saw in its operating margin.
Keep in mind that Ford Credit’s net profit margin can sometimes be higher than the corresponding operating margin due mainly to gains or benefits arising from taxes, investment, etc.
While Ford Credit’s net margin has been extraordinary, it’s been on a downtrend since fiscal 2017, plunging below 15% in fiscal 2020 2Q for the first time.
However, we are seeing a significant turnaround in Ford Credit’s net profit margin going into fiscal 2021.
As of fiscal 2021 1Q, Ford Credit’s net margin reaches 25%, a record high since 2018.
Again, despite a temporary setback in the age of the COVID-19, Ford Credit has remained resilient and even thrived as reflected in the increasing net profit margin in the last several quarters.
Ford’s Consolidated Net Profit Margin
Ford’s consolidated net profit margin reached as much as 3% in fiscal 1Q 2021, the highest level since the pandemic began.
While Ford Credit has a much higher net margin, the consolidated company’s net profit margin could only reach 3% in the latest quarter and even less in the past, due primarily to the low profit margin of Ford Automotive.
As Ford Automotive has been the company’s largest subsidiary, contributing more than 80% of revenue and at a much higher profit, it’s not a surprise to the consolidated company’s net margin being bogged down by that of Ford Automotive.
In short, Ford’s consolidated company is more or less a low-margin business, driven primarily by the low profitability of its Automotive sector.
Ford Automotive is a low-margin operation, having only a gross margin that averages around 7% since fiscal 2017.
When combined with the Mobility and Corporate segments, Ford’s company excluding Ford Credit operating margin reaches even lower, at no higher than 3% in the past 5 years.
In contrast, Ford Credit is a thriving business even in the COVID age, with the operating margin reaching the highest at more than 30% in fiscal Q1 2021.
Again, Ford’s company excluding Ford Credit net profit margin has been below 3% since fiscal 2017, and even turned negative in early 2020.
Similarly, Ford Credit’s net profit margin averages 20% since fiscal 2017, and clocked in at 25% in fiscal 1Q 2021.
In short, Ford’s consolidated company would not have been profitable without Ford Credit.
Ford’s automotive business is a low-margin business and has even incurred losses in the last few quarters.
References and Credits
1. All financial figures in this article were referenced and obtained directly from Ford’s annual and quarterly filings available in Ford Investors Relation.
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