2024-01-18 02:41:26 ET
Summary
- Ford's share price is currently below the midpoint of its 52-week range, but the author believes it is ready to move higher with moderate risk.
- I evaluate Ford using a proprietary model that considers macro, sector, valuation, technical, and brand factors.
- Ford's recent challenges include supply chain disruptions, higher interest rates, and labor negotiations, but the company's restructuring plan and focus on hybrid vehicles show potential for growth.
Investment Thesis for Ford Motor Company
The Ford ( F ) share price of $11.17 at opening on January 17, 2024 is floundering below the $12.53 mid-point of its 52-week range of $9.63 - $15.42. For Ford, 2023 was a year of three overarching corporate battles: resetting the post-Covid supply-chain disruptions, dealing with progressively higher interest rates which dampened consumer demand, and enduring protracted labor negotiations that consumed corporate energy. However, all three 2023 events have run their course and I believe the share price is ready for a modest movement north with only moderate risk.
Thesis Support Methodology
My Ford evaluation descends through the five key factors of my proprietary model: Macro, Sector, Valuation, Technical, and Brand discovery. The interlock of all five components contributes to my conclusion and recommendation.
Given Ford’s place in the Consumer Discretionary sector, an important reference point toward any stock recommendation is consideration whether the economy is charging into an expansion or contraction phase as, generally, a weaker economy ignites a bear market with main street spending pullbacks. Next, I review Ford's sector strength, particularly as it relates to Electric Vehicle ((EV)) versus Internal Combustion Engine ((ICE)) demand. After sector observations, I proceed to review Ford’s results through five critical valuation measures: Price Earnings multiple ((FWD)), Price to Sales, Operating Margin %, Enterprise Value to Free Cash Flow, and Debt to EBITDA. These five metrics succinctly address Income Statement, Balance Sheet, and Cash Flow results. I then review recent share price momentum given key technical indicators. In the final review piece, I explore the brand's leadership and whether it can produce share price appreciation.
Overview of Ford
The Ford blue oval is an iconic symbol across North America. Since its inception in 1903, the Ford brand has become synonymous with American ingenuity. Ford is the 6 th largest car manufacturer in the world , and its F-150 pickup is perennially the #1 sold vehicle in the USA and Canada . For 2023, its U.S. sales rose 7.1.% to nearly 2 million vehicles and global revenues exceeded $174 billion ((ttm)).
The rear-view mirror does show many well-known and past Ford mis-steps: the infamous Edsel launch in 1958-1960, a bloated management structure through recent decades , supply-chain mismanagement (inadequate risk mitigation), disturbing product quality control , and a confusing to-the-public brand experience across Ford, Mercury, and Lincoln .
Our windshield view notes that the company announced its “Ford+” plan on March 2, 2022, whereby it will restructure into three separate divisions : Ford Blue to lead ((ICE)) vehicles, Ford Model ((e)) for EV’s, and Ford Pro to deliver a one-stop shop for government and commercial customers.
The Macro Outlook: 2024 is Remarkably Unsettled
I simplify the macro exploration to seven agents to broadly illustrate whether we are in a bull or bear cycle. Specific macro targets are derived from a comprehensive ten-year analysis of key datapoints and how they correlate to market cycles.
The macro review begins with the Presidential Approval rating, a broad sentiment indicator that captures how people feel about the country’s general direction, and per ABC News/FiveThirtyEight, it currently aggregates to less than a 40% approval . For 2024, Presidential leadership is especially interesting given it’s an election year.
Both the Consumer Price Index ((CPI)) and Unemployment rate are monthly issuances from the U.S. Bureau of Labor Statistics ((BLS)), an agency of the Department of Labor. The year over year ((CPI)) sits at 3.4% for December 2023, up from November’s 3.1% . At 3.4%, the ((CPI)) remains stubbornly above the Federal Reserve’s Federal Open Market Committee’s ((FOMC)) 2.0% target. December’s Unemployment rate was 3.7%, unchanged from November .
Our fourth macro indicator is the annualized, quarter over quarter rate of Gross Domestic Product ((GDP)) growth from the U.S. Bureau of Economic Analysis, an agency of the Department of Commerce, and it advises that for Q3, 2023, the annualized rate is 4.9% as compared to Q2’s 2.1% . The first of the three estimates for Q4, 2023 will be issued on January 25 th , and given the robust Unemployment rate, I expect it to be 4.5%+.
A key macro indicator is the yield difference of the 10-Year Treasury Constant Maturity Minus 2-year Treasury Constant Maturity treasuries, and on January 16, it was a negative 15 points .
This inversion of the 2-year yield being greater than the 10-year yield is often a harbinger of a recession. Furthermore, rising treasury yields support the “higher for longer” interest rate mantra as investors re-price their expected returns, but the current 15-point spread is among the least 10T minus 2T differentials we've seen in the past year, so that’s an improving (albeit a mildly concerning) indicator.
Our second-last indicator is the price of a barrel of crude oil ((WTI)), $72.32 at time-of-writing. My correlation analysis of ten years of ((WTI)) pricing to stock market bull conditions reveals that WTI in the $55 to $80 range is healthy for the market and sufficient for producers.
The China Purchasing Managers Index ((PMI)) concludes our macro analysis and its importance is noted due to U.S.- China trade being almost $700 billion/year. Moody’s Analytics advises that the December ((PMI)) was 49.0 , a decrease from November’s 49.4.
Macro Summary
The seven macro datapoints reveal the following: an improving, but still fragile economy weighed down by inflation and geo-political concerns. On the plus side, although the ((FOMC)) raised the Federal Funds Rate ((FFR)) six times in 2022 (4 x .75%, 1 x .25%, 2 x .50%) and four times in its eight 2023 meetings (4 x .25%) to a current 5.25% - 5.50% target range, the current thinking is that the dot plot for 2024 could see 3 step-downs of .25% each.
There was much discussion in mid-2023 as to whether the U.S. was heading into a "soft" or "hard" recession. Neither happened; in fact, retail spending rose 3.1% year-over-year for what is generally called the holiday period November 1 to Christmas Eve . An added broad indicator on the consumer purchasing outlook is the just issued surge in homebuilder sentiment as it climbed 7 points to 44 in January, the most in nearly a year .
Current macro conditions of moderating inflation, low unemployment, and strong ((GDP)) figures as shown in Figure 1 are generally favourable to Ford.
Figure 1: Macro Economic Summary (Author (from inputs as noted))
Sector Review: Lower Interest Rates Will Assist All Car Manufacturers
Ford operates in the auto manufacturers industry of the Consumer Cyclical sector. The entire sector, as the name implies, is subject to elastic demand arising from macroeconomic push and pulls. The sector is intensely competitive and is further affected by two elements that do not appear as forcefully in most other sectors:
- The availability and attractiveness of used products. As manufacturers improve quality, they dampen the need for new vehicles.
- Government activity toward directing outcomes. Adam Smith’s thoughtful perspective in 1759 of the efficient “invisible hand” is being co-opted by governments, notably in carbon capture targets and ((EV)) subsidies.
Regardless, 2023 was a healthy sales year for the sector as 15.6 million vehicles were sold in the U.S., a 12% increase from 2022 and edging close to pre-Covid amounts of 17 million per year .
North American new vehicle demand is assisted by the immigration policies of the Canadian and U.S. federal governments. From 2013 to 2023, Canada’s population increased 11% to 39 million and U.S. by 7% to 340 million .
Interest rates especially weigh on the sector. The prime rate is about three percentage points higher than the ((FFR)) , and a vehicle loan another 1 to 2 percentage points above that, depending on one’s credit score. Given an average new vehicle sales price of about $49,000 , a decline in the 2024 ((FFR)) of say one or two percentage points is impactful to the consumer wallet, as Figure 2 illustrates:
Figure 2: Auto Loan Payments (Author)
You can’t discuss the sector without addressing the elephant in the room: Tesla (T). Its share price, brand growth, and vehicle sales have been so astonishing that the company is considered a leader in both the auto and technology sectors. But just as Mark Twain said his death had been greatly exaggerated, so too applies to ((ICE)) vehicles. On January 11 th , Hertz said it would sell a third of its global EVs to buy ((ICE)) vehicles and it cited the higher EV expenses on collisions, lower demand for them, and poorer resale as contributing to its decision .
But the real story for 2024 will not be about ((EVs)), it will be about hybrids, a relatively new and improving technology of gas and electric combinations. U.S. 2022 hybrid vehicle sales of 801,550 was 76% higher than 2021 , and 2023 totals will likely be up another 35% pushing 2023 sales to 1.1 million.
Sector Summary
Assuming no 2024 recession, the sector should see 2024 sales growth arising from an increased consumer appetite for hybrid engines and added vehicle availability in the aftermath of Covid disruptions resulting in the 2024 vehicle exceeding 3 million in a more normalized environment .
Valuation: Today, Ford is Moderate Value
Base valuation metrics for Ford include a ((PE)) ((FWD)) of 6.6 and a further low-confidence Price to Sales of .3, in comparison to the broader market S&P 500 averages of 22 and 2.5 .
Ford’s Operating Margin of 3% and its Enterprise Value ($149.3B) to Free Cash Flow ($5.6B) ratio of 26.7 are also poor. The company is heavily weighed down by its total debt ($142.7B), which yields a Debt to EBITDA of over 8 times. Ford’s falling share price gives a dividend yield of over 5%.
However, the above results are built from legacy data-points; if we constrict the view to just Q3’23, we see improvement in financial performance with revenue rising by 11% year-over-year to $44 billion and a net income of $1.2 billion versus a net loss of $827 million in Q3’22 .
Figure 3 compares Ford's Enterprise Value to each of EBITDA and ((FCF)) to GM, Stellantis, and Tesla. The resulting ranges are exceptionally broad.
Figure 3: EV/EBITDA & EV/FCF (Author, using data from Seeking Alpha & Yahoo Finance)
The peer EV/EBITDA ranges are not supportive to a total exit value calculation and I further note that the EV/EBITDA average for the auto manufacturing was 11.96 for 2021 and that consumer discretionary averaged 17.03 for Q4, 2023 . In Figure 4, I create a subjective EV/EBITDA range that yields a more focused total exit value. From that amount, I deduct cash and total debt to produce a capitalization estimate and a possible share price.
Figure 4: Possible Share Prices From Exit Values (Author, using data from Seeking Alpha & Yahoo Finance)
Recognizing Ford’s weak financials and the Q3-Q4 labor disruption , the Analyst community has been reducing its recent Quarterly ((EPS)) targets: Q2’23 projected was $.55 (beat at $.72), Q3 projected $.41 (missed at $.36) and Q4 which comes out February 6 th , is estimated at $.13 . Figure 5 forecasts share price possibilities based on Q2'23 and Q3'23 EPS results: the valuation methodology was to take the midpoint of Q2 and Q3 to reveal a share price given the ((PE)) ((FWD)) of 6.62. I replicated the view at a stretch .60 interpolation of those two EPS figures. Q2 and Q3 are likely suitable inputs as they had labor disruption negativity, but not to the extent of Q4, and I opine that Q1'24 will return to the proverbial "normal" (after extraordinary costs).
Figure 5: Share Price Projections (Author, using data from Seeking Alpha & Yahoo Finance)
In Figure 6, I box share price projections at different dividend projection, growth rates, and levels of return, notwithstanding that some estimates put the Ford cost of equity as high as 21% .
Figure 6: Gordon Model (Author, using data from Seeking Alpha & Yahoo Finance)
Valuation Summary
Collectively, the valuation review suggests Ford's share price is slightly undervalued given current inputs and growth estimates, as supplemented by my particular subjective factors.
Technical: Ford Momentum is Stuck in a Rut
The Ford ((RSI)) of 39 on January 17, along with the ((MACD)) crossing below the signal line, a fairly narrow Bollinger envelope, and a put/call volume ratio of 1.16 , all combine to show muted share price sentiment; likely, the market is waiting for the February 6 th proof point. This is additionally supported by a January 16 share closing price of $11.46 that bobs between the 50-DMA of $11.08 and the 200-DMA of $12.23.
Technical Summary
Figure 3 highlights the unimpressive share price movements over the last five years, and in particular the $10 to $15 floor and ceiling since June 2022. There is no current momentum favoring the Ford share price.
Figure 6: Ford Share Price, Last 10 Years (Seeking Alpha)
Brand: Ford Can Win the Hybrid Market
Ford’s vision and purpose is loudly stated as “We are here for one purpose, to help build a better world, where every person is free to move and pursue their dreams. ”
Since October 2020, Ford Motor's President and Chief Executive Officer has been James (Jim) D. Farley, Jr. Mr. Farley has shown shareholders “ups” as evidenced by concluding the UAW labor agreement in Q4 2023 and seizing the hybrid vehicle opportunity -an effort that produced hybrid sales growth of 55.5% in Q4, 2023 .
Mr. Farley has also given the shareholders “downs”; in particular, a parade of vehicle re-calls, 5,692,135 vehicles in 2023, which is 2x more than Stellantis, the next closest automaker . Plus, he was tactically slow to slim the organization during the Covid storm.
Brand Summary
The three-unit corporate re-structure should enable improved focus throughout the organization, and the move to hire Doug Field away from Apple ( AAPL ) to lead its emerging technology efforts is considered to be a brilliant part of Jim Farley’s vision.
The 2023 Black Swans of labor disruption, high interest rates, and corporate inertia have been conquered and the Brand is now showing signs of gathering strength.
With UBS going from Buy to Neutral on January 17 , this would set the 24 Analyst ratings as 0 Strong Buy, 3 Buy, 19 Hold, 2 Underperform, and 0 Sell. The average price target ((PT)) is $12.64 .
Overall Conclusion: Ford is a Careful Buy
Current macro and sector reviews lean to upside share price movement for the auto sector, with Ford's valuation metrics further suggesting modest possibilities. Technical indicators are muted to bearish. However, it’s clear that Ford is committed to reinvigorating its brand as evidenced from its corporate reorganization, its evolving supply-chain corrections , and its exciting focus on hybrid offerings (Ford has the highest and second highest truck hybrid sales in North America) .
Assuming Ford returns a respectable Q4 ((ER)) on February 6 -even with the expected $1.6 billion hit from the labor disruption - I forecast a ((PT)) range of $13 to $15. As with any stock, I suggest easing into your purchase in a few tranches as part of a diversified portfolio.
For further details see:
Ford: A Careful Buy