Ford, GM diversification adds $23 billion but draws investor caution

Ford shares surged 45 percent, adding $23 billion in market value, after launching Ford Energy in May, while GM climbed 16 percent on its earnings call. Both companies are pushing into defense contracting and grid-scale energy storage as they seek higher-margin, less-cyclical revenue streams.

"The industry is in decline," said Tom Narayan, equity analyst at RBC, noting that auto suppliers are also diversifying.

Ford's grid-scale energy-storage business involves repurposing its EV battery factory in Kentucky at a cost of $2 billion between 2026 and 2027, about 10 percent of total expected capital expenditures. GM Defense is projected to bring in $700 million in revenue this year against GM's $186 billion total. Both automakers raised full-year guidance for the second time this year. Ford shares have since moderated but remain up more than 20 percent since the Ford Energy launch.

Defense budgets are rising globally and U.S. energy-storage demand is expected to grow at a compound annual rate of 38 percent through 2030, according to Morgan Stanley. But even under optimistic scenarios, these ventures would contribute less than 1.5 percent of GM's operating profit by 2030 and about 5 percent of Ford's by 2029.

The $40 Billion Lesson From the 1980s

The current push echoes the mid-1980s, when U.S. automakers used profits from a booming economy and import restrictions on Japanese cars to fund acquisitions outside their core business. Ford bought financial-services companies including First Nationwide and Associates. GM acquired defense manufacturer Hughes Electronics and plowed more than $40 billion into an automation push.

Those attempts largely failed. Ford fell behind Japan's engine technology in part because it spent too much on diversifying instead of focusing on its core business, an industry analyst argued in a 1990 Los Angeles Times article. GM's plant productivity actually declined over its heavy investment period in the 1980s, according to research from Marvin Lieberman and Rajeev Dhawan of UCLA. More recently, both automakers took massive write-downs after big investments in electric vehicles.

Growth Rates vs. Profit Contribution

The bullish argument this time is that Ford and GM aren't spending buckets of money or stepping far outside their comfort zone. GM's infantry-squad vehicles for the military are based on an off-road truck and use commercial off-the-shelf parts. Ford Energy repurposes existing battery manufacturing capacity.

The potential upside is real. Defense stocks in the S&P 500 trade at 30 times forward earnings, while energy-storage-related stocks such as Fluence Energy and Tesla trade at even higher multiples. Ford and GM trade at 7.8 times and 6.2 times forward earnings, respectively.

But the math is sobering. GM Defense thinks the segment can grow at a compound annual rate exceeding 30 percent with double-digit margins. Even at an average growth rate of 35 percent, its operating-profit contribution would be less than 1.5 percent by 2030. Morgan Stanley's Andrew Percoco estimates Ford Energy could generate $588 million of operating profit by 2029, about 5 percent of the total operating profit Wall Street expects for that year.

The defense opportunity is also expanding. Lockheed Martin won a $58.6 billion contract from the U.S. Army to produce Patriot interceptor missiles, converting a $4.7 billion one-year deal into a seven-year procurement plan through fiscal 2032. The Pentagon is pressing contractors to accelerate production as conflicts in Iran and Ukraine strain U.S. weapons stockpiles. The Center for Strategic and International Studies estimates the U.S. military has fewer than 1,000 Patriot interceptors and fewer than 250 THAAD interceptors on hand.

The concern isn't Ford and GM's intent to diversify, which seems prudent. It is that they keep finding themselves chasing markets too late or looking for solutions outside their core business. Their push into EVs was driven by an impulse to pursue a hot trend favored by investors, and their 1980s forays were influenced by the corporate-diversification culture in vogue at the time, noted Edgar Faler, an analyst at the Center for Automotive Research.

Foresight has never been U.S. automakers' strength. That is one reason investors should view their shiny new pursuits with some caution.

This article is for informational purposes only and does not constitute investment advice.