Ford’s multi-billion dollar undervalued Turkish delight (NYSE:F)

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All kinds of things in our world are not what they were just a few decades ago. Donald Trump is not just a real estate developer. Volvo is no longer Swedish (it’s Chinese). And Ford (NYSE:F) has a crucial operation in Turkey.

Turkey? What is that?

OK, most of you know that Turkey is a country… somewhere. But why is Turkey suddenly more important today than it has been for more than a century?

We live in a world of growing geopolitical risks, including new constraints on just-in-time (JIT) inventory management and supply chain disruptions of all kinds. Over the past half century, and the past 30 years in particular, supply chains have expanded globally to take advantage of ever-increasing efficiencies, which meant they had to be located far from where they are subject to higher transportation costs and risks if there is a disruption anywhere along the way.

Ford forms partnership in Turkey

Against this backdrop, Ford’s strategy for an R&D and manufacturing location outside of China – but still not in North America or Europe – has taken on new importance. Ford holds a 41% stake in Ford Otosan (FROTO), which is a Turkish entity. It has approximately 15,000 employees, 10% of whom are engineers.

Focus on vans and trucks

Ford Otosan has primary R&D responsibility within Ford for the delivery van (“vans”) product lines. There are three basic sizes/platforms of these pickups, only two of which are sold in the United States. All three sizes are sold in Europe.

These delivery vans have taken on increasing societal and economic importance in 2020 with the boom in home deliveries. Not only Amazon (AMZN), but also a growing share of traditional retailers, have seen their new or existing home delivery business increase.

Crafting capacity doubled from 450,000 to 900,000

Until early 2022, Ford Otosan in Turkey had the capacity to manufacture 330,000 Transit and Custom vans, plus 110,000 Courier vans – per year. In addition, 15,000 large commercial trucks.

In reality, these Ford Otosan manufacturing plants operated well below capacity in 2021, producing around 348,000 units. This will change in 2022 and beyond, not just due to higher capacity utilization in Turkey. Ford Otosan acquires the capacity of the Ford Europe plant located in Romania. This means Ford Otosan’s overall annual manufacturing capacity will be around 900,000 units in a few months.

If you apply Ford’s 41% stake in Ford Otosan to the future aggregate production capacity of 900,000 units per year, that implies 369,000 unit equivalents allocated to Ford’s stake. These utility vehicles, ranging from small delivery vans to large trucks, are considered to be some of the most cost-effective vehicles in the industry. This is also a reason why they are given priority in terms of allocation for semiconductors and other components.

Proportionality inside Ford

If you count 348,000 vehicles actually sold in 2021 out of Ford’s overall number of 3.9 million worldwide, that’s about 9%. For the overall capacity of 455,000 in 2021, that would be almost 12%. Then, looking towards the end of 2022 or 2023, that would potentially be a capacity of 900,000 divided by 3.9 million (assuming Ford stays broadly still, a dubious assumption). At this point, we would be around 23% in size within Ford.

Again, Ford’s 21% stake – implying 369,000 capacity units after the Romania acquisition – would “only” imply a 9% degree of materiality for Ford overall.

That 9% would be more than Ford Otosan’s overall revenue as a percentage of all of Ford – $7 billion last year versus $136 billion for all of Ford. Of course, this revenue contribution will be much higher next year after the integration of Ford Otosan in Romania.

Ford Otosan has a market cap of approximately $7.3 billion. Ford’s 41% stake in Ford Otosan would therefore be worth about $3 billion. That’s just under 5% of Ford’s overall market cap, reflecting the fact that Ford Otosan may be undervalued (7% of revenue, but 5% of market cap) in Ford’s portfolio, especially if it is argued that the Ford Otosan product line (trucks and vans) really should be rated higher than the average Ford vehicle, globally.

Otosan reduces and diversifies geopolitical risk for Ford

Even though Ford manufactures the Transit minivan in both Kansas and Turkey, Ford Otosan doesn’t really “compete” with Ford’s North American operations. Instead, Ford Otosan acts as a counterweight to Ford’s component development, manufacturing and supply chain, which stretches primarily from Europe to Asia.

We saw in 2020 how China decided to isolate itself from the rest of the world. It is even extremely difficult to travel in China. For example, look at how Finnair had to completely change its business, which until January 2020 previously relied on flying over Russia to a long list of cities in and around China. In 2022, we saw a second wave of Chinese lockdowns.

By investing in R&D as well as production in Turkey, Ford is therefore spreading the risk of unpredictable political events in Asia as well as in Europe. Turkey is a somewhat uncorrelated geography, not beholden to any of the major powers or organizations (other than nominally being part of NATO).

Impact on Ford shareholders

Ford’s growing exposure structure to Turkey, with a local Turkish partner, helps reduce risk to Ford’s overall global supply chain and its ability to serve customers in most geographies. The smallest impact may be for the US market, which is also why US shareholders have the hardest time seeing the benefits of this risk reduction.

When combined with the calculations described above – this suggests that Ford Otosan is undervalued across all of Ford’s shareholders – this added advantage for Ford in the face of a new and more uncertain world with lower geopolitical risk vis-à-vis the EU and a China-centric Asia makes an improved case for Ford stock.

About Louis Miller

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