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Stocks  | July 8, 2019

Ford Motor (F) is readying a "big move" into all-electric vehicles, with its existing Volkswagen (VWAGY) alliance set to expand next week, Morgan Stanley said. Ford stock was flat.

While it's investing $11 billion in electric-vehicle technology, Ford has focused thus far on hybrid cars vs. all-electric cars. That's about to change, according to Morgan Stanley analyst Adam Jonas.

"While Ford and VW have yet to announce any definitive agreement around joint-BEV development," he wrote Wednesday, "we believe investors should prepare for significant levels of potential collaboration to share development and manufacturing costs." The term "BEV" refers to battery-electric vehicles.

Jonas cited a June 26 Bloomberg report that an expanded Ford-Volkswagen alliance could arrive Thursday, at a meeting of Volkswagen's supervisory board. The tie-up is likely to include an investment in Ford's Argo AI self-driving car unit.

Jonas explained why the move is critical for Ford's long-term strategy:

  • Among the major automakers, Ford and Toyota Motor (TM) alone don't sell a BEV in the domestic market. Meanwhile, BEVs represent less than 1% of sales for Volkswagen, General Motors (GM) and Fiat Chrysler (FCAU). Excluding Tesla (TSLA), only one out of every 400 cars sold in the U.S. is a fully electric car, according to Morgan Stanley. But by 2050, the firm estimates a billion battery-electric cars could be on the road around the world, accounting for as much as 90% of all vehicle sales.
  • Ford, the king of trucks, is starting a "pivot to BEVs." Ford's bringing a BEV to China this year, a "Mustang-inspired" battery-electric SUV to the U.S. in 2020, and a battery-electric version of the top-selling F-150 truck eventually. Jonas also noted Ford's new investment in electric truck startup Rivian includes developing a battery-electric vehicle.
  • The Volkswagen tie-up would allow Ford "to close the BEV gap in terms of commercialization while mitigating the associated execution and financial risks." Volkswagen, the world's largest carmaker, is itself making an ambitious $91 billion electrification push and has said a partnership would increase economies of scale.
  • Ford can't afford to develop hybrid and pure electric cars in parallel, so must "pick a path and commit to it." Currently, Ford's electrification strategy calls for more BEVs alongside a hefty lineup of hybrid and plug-in hybrid EVs.
  • Hybrid technology adds costs and complexity to vehicle architecture. It also fails to bridge the gap to current and future emissions standards around the world, Jonas said. So he's "bearish" on hybrids.

Jonas expects Ford's move to BEVs to deliver a hit to near-term earnings, but prove ultimately beneficial. He has an equal-weight rating and price target of 10 on Ford shares.

Ford Stock Eyes Buy Point

Ford stock finished unchanged at 10.20 on the stock market today. Shares are eyeing a potential 10.60 flat-base buy point. GM stock gained 0.9% to 38.50 and has been meeting resistance near the 40 level. Volkswagen stock edged up 0.1% to 17.56 as it consolidates with an 18.94 entry.

GM stock, Ford stock and Volkswagen stock all have relative strength lines that have made little or no progress in 2019. The RS line, the blue line in the chart above, tracks a stock's performance against the S&P 500.

Tougher clean-air rules take effect in the European Union in 2020, compelling automakers such as Volkswagen and Ford to comply with more electric vehicles or risk huge fines.

An expansion of the Ford-Volkswagen partnership would come after they announced a pact on commercial vans and trucks in January.

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