This article explores Ford Motor (NYSE:F)’s 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, particularly the automotive or the financial service sector, derives a better profit.
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 markup of the company’s automotive products, and indirectly, the moat of Ford’s automotive business.
A high gross margin implies a bigger moat or a monopoly that Ford has over its competitors, which can range from brand power to quality products that the company produces.
A wide moat provides Ford with several advantages, including 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 had been on a decline since fiscal 2017 and clocked at only 2% in fiscal 2020 Q2 before recovering to about 7% in the latest quarter in fiscal 2021.
At this level of gross margin, Ford Automotive does not make much money or profit and would probably incur a loss after accounting for other expenses such as research and development costs, marketing and administrative expenses.
Therefore, Ford’s automotive sector is a low-margin business and does not make much money at a gross margin of only 7%.
Ford Company Excluding Ford Credit’s Operating Margin
For Ford Company Excluding Ford Credit, this business sector is made up of Ford Automotive, Mobility and Corporate and Others which we saw earlier.
That said, Ford Company Excluding Ford Credit’s operating margin has been having the same downtrend as the automotive sector and has performed even worse than it.
As of fiscal 2021 3Q, Ford Company Excluding Ford Credit’s operating margin came in at nearly -3% on a TTM basis, one of the worst results the company has ever seen.
In its prime days back in fiscal 2017, Ford Company Excluding Ford Credit’s operating margin could reach as much as 2%.
However, this figure has been on a decline and in the negative region for most of the quarters as seen in the chart, implying that this business segment has been incurring an operating loss.
Again, at this level of operating margin, Ford Company Excluding Ford Credit is a low-margin business and does not make money as seen in the negative operating margins in several quarters.
The low profitability of this sector is expected as Ford Automotive is the biggest component under Company Excluding Ford Credit, with revenue totaling 99% of the overall sales in this sector.
As Ford Automotive is a low-margin business, it makes sense that 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%.
Moreover, Ford Credit’s operating margin also has been on a rise, reaching a record high of 45% as of fiscal Q3 2021 on a TTM basis.
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 has even exceeded that of the pre-COVID levels in fiscal 2021, suggesting that Ford’s lending business is making even more money during and after the pandemic.
In short, Ford Credit is a high-margin business and makes tonnes of profits for the company even during and post 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 Company Excluding Ford Credit.
This is so because Company Excluding Ford Credit is the largest sector, and is much bigger than Ford Credit.
While the consolidated operating margin may look similar to that of Company Excluding Ford Credit, the consolidated results are slightly higher.
Moreover, Ford’s consolidated operating results also incurred smaller losses in fiscal 2020 compared to the non-consolidated results which we saw earlier.
As of fiscal 2021 Q3, Ford’s consolidated operating margin came in at 1%, a much higher figure than the -3% reported in Company Excluding Ford Credit in the same quarter.
Despite having the high margin of Ford Credit, Ford’s 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 Company Excluding Ford Credit’s Net Profit Margin
Ford Company Excluding Ford Credit’s net profit margin is having a similar trend as the respective sector’s operating margin but at slightly better results.
For example, Ford Company Excluding Ford Credit’s net profit margin of -1% reported in fiscal 2021 Q3 was slightly better than the -3% seen in the operating margin.
Ford Company Excluding Ford Credit’s higher net margins compared to operating margins have been driven primarily by investment gains.
One such example was a$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 in most instances.
One notable trend observed in Ford Company Excluding Ford Credit’s net margin is the significant turnaround of the net margin in fiscal 2021.
In fiscal 2020, Ford Company Excluding Ford Credit had been having net losses consecutively for several quarters.
However, the losses had narrowed in subsequent quarters and Ford was reporting a positive net margin of 1% in fiscal Q1 2021.
Unfortunately, the turnaround did not last long and Ford’s net margin dived again in subsequent quarters, reaching -1% as of Q3 2021 on a TTM basis.
Also, the low net profit margin of this sector indicates that Ford Company Excluding Ford Credit is a low-margin business and does not make much money.
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 since fiscal 2017.
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 had 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 3Q, Ford Credit’s net margin topped 40%, a record high fiscal 2017.
Again, despite a temporary setback in the age of the COVID-19, Ford Credit has remained resilient and even thrived as reflected in the significant growth of the net profit margin in fiscal 2021.
All in all, Ford Credit runs a highly profitable business and is making tonnes of money for Ford.
Ford’s Consolidated Net Profit Margin
Ford’s consolidated net profit margin reached as much as 2% in fiscal 3Q 2021, one of the highest levels ever reported since the pandemic began.
While Ford Credit has a much higher net profit margin, totaling 40% in fiscal 3Q 2021, the consolidated company could only achieve a net margin of 3% in the same quarter.
The reason for the low net margin in the consolidated company is Ford Automotive.
As Ford Automotive is the company’s largest subsidiary by sales volume, contributing more than 90% of revenue as of fiscal 3Q 2021 on a TTM basis, it’s not a surprise to see a significantly lower net margin for the consolidated company.
In short, Ford’s consolidated company is more or less a low-margin business, driven primarily by the low profitability of its Automotive sector.
To recap, Ford Automotive is a low-margin operation, having only a gross margin that averages around 7% since fiscal 2017.
When consolidated with the Mobility and Corporate segments, Ford Company Excluding Ford Credit’s operating margin reaches even lower, at no higher than 3% in the past 5 years.
To make matter worse, Ford Company Excluding Ford Credit’s operating margin has been on a decline since fiscal 2017, way before the arrival of the COVID-19 pandemic, and has clocked at below 0% in almost 2 out of the 5 years shown in the chart.
The low operating margin indicates the low profitability of Ford’s automotive business.
In contrast, Ford Credit is a thriving business even in the COVID age, with the TTM operating margin reaching 45% as of fiscal Q3 2021, a record high in the past 5 years.
In terms of net profit margin, Ford Company Excluding Ford Credit also has been seeing its net profit margin declining since fiscal 2017 and even plummeting below 0% as of fiscal 2021, illustrating the losses that this business segment has been having.
In contrast, Ford Credit’s net profit margin averages 20% since fiscal 2017 and totaled 40% as of fiscal 3Q 2021, also a record high for the subsidiary.
As Ford Credit contributed the majority of the profit, Ford’s consolidated company would not have been profitable without Ford Credit.
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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