Ford Faces a Profitability Threat It Hasn't Seen Since the 2008 Financial Crisis

Many potential Ford Motor Company (NYSE: F) investors aren't aware that one of the automaker's best generators of profit isn't a vehicle. That's right, Ford Credit, which acts as a banking entity for the company, is a major driver of profit for the Blue Oval. While Ford Credit is often overlooked, and typically generates only about 5% of revenue any given year, it provides 15% to 20%, sometimes more, of the company's profits. You can see in the graphic below that Ford Credit is highly profitable, except for 2008. Let's dive into why, and how, Ford is again facing such a serious threat to profits.

One of these is not the same

Data source: Ford SEC filings. Chart by author.

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That's a great long-term look at Ford Credit and its ability to generate earnings before taxes (EBT). Not only is Ford Credit a high-margin business for the automaker, it also distributes cash back to the parent company, Ford. In fact, just last year Ford Credit generated $2.6 billion in EBT and sent $1.7 billion in cash back to Ford, which can be used to fund growth in electric vehicles (EVs), among other things, or even help pay the company's lucrative dividend.

Ford Credit finances some of its customer sales and leases, and for the latter the banking entity projects expected residual values and return volumes of the vehicles it leases. Actual proceeds realized by Ford Credit are upon the return of the leased vehicle, which could be lower than the initial value projected. When this happens on a large scale it can cripple profitability.

That's what happened during 2008, when a significant economic downturn hurt vehicle demand and values. Further, during the 2008 financial crisis credit markets tightened, which increased Ford Credit's cost of borrowing. Fast-forward to today and there is no financial crisis, but there is a coming wave of off-lease EVs that are significantly less valuable than they were recently -- potentially leaving entities like Ford Credit on the hook for big losses.

Years after consumers and early adopters jumped into the EV market, sometimes taking lease deals that were easier on monthly payments and could sometimes include incentives, those are now coming off-lease. Credit agency Experian estimates that off-lease EV volume will peak in 2028 with nearly 800,000 EVs flooding the market. Already we're seeing movement, with EVs expected to make up 15% of off-lease used vehicles by the end of 2026, compared to only 7.7% during the first quarter.

Image source: Ford Motor Company.

Why it matters now

Here's the kicker: Industry experts are expecting the resale value of those EVs will check in around $10,000 less than automaker finance entities projected, and could range anywhere from $5,000 to $20,000 less, depending on make and model. Using the $10,000 figure, that would be an industrywide loss of about $8 billion for expected models coming off lease in 2028 -- that's big time loss.

Here's the good news for Ford investors, and the not-so-good news for Tesla (NASDAQ: TSLA) and General Motors (NYSE: GM). According to Automotive News Research & Data Center, Tesla and GM dominated EV lease volume last year. The data estimates roughly 228,000 Tesla EVs were leased last year, and nearly 102,000 EV leases for General Motors. Ford checks in at about half that of its Detroit rival, with a little over 52,000 EV leases last year.

For investors, it's not time to panic. This situation is far less dire, and at far smaller volumes, than the situation in 2008. While automakers with captive finance arms that lease vehicles likely can't avoid losses from these EV off-lease vehicles, it won't by any means bankrupt an automaker. That said, off-lease EVs are a development investors must watch through 2028, because it could impact the automaker's bottom line more than anyone would have guessed a couple of short years ago.

Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends Experian Plc and General Motors. The Motley Fool has a disclosure policy.