2024-01-02 22:43:45 ET
Summary
- Ford Motor is expected to break out from its consolidation range and experience significant growth over the next several years, potentially becoming a 10-bagger stock.
- The adoption of electric vehicles (EVs) is accelerating, with government incentives, capital investments, and increasing sales numbers indicating a shift towards mass adoption.
- Ford has the potential to become a leader in EV sales, leveraging its strong brand loyalty, as evidenced by increasing sales and Millennial investment interest in the stock.
- Ford's 4th Industrial Revolution technology and real estate value are underappreciated by markets right now, representing a freeroll on future cash generation.
- Ford's dividend sits above 5% now, is expected to increase slightly over time and benefit from share buybacks.
Ford ( F ) has the potential to be a top dividend stock for a very, very long time as the energy transition and 4th Industrial Revolution evolve in coming decades. It is the type of stock that I think you could see Berkshire Hathaway ( BRK.B ) and Warren Buffett buy soon. And remember what Buffett says is his favorite holding period: "forever."
Of course, I know there is no such thing as forever, but as certain charts like Lockheed Martin ( LMT ) show, sometimes almost forever is pretty good too.
Lockheed Martin holds a spot on our "Very Short Lists" (coverage universe) and makes regular appearances on our quarterly "Punch Card Stocks" list (quarterly focus stocks). LMT is one of our favorite stocks to buy when it is cheap, alas, it is rarely cheap.
Right now, as I'll explain below, Ford Motor is cheap.
Over the next several years, I believe that Ford will break out from the consolidation range it has been in the past couple years. Over the next decade, I believe Ford stock will rise up and to the right in a way that makes it one of those rarely cheap stocks.
By scaling in during 2024, you can lock in a great dividend yield over 5% and take part in what I see as an epic journey to being a half trillion dollar market cap company. Currently, Ford has a roughly $50 billion market cap, so yes, I think that Ford is likely a 10-bagger from here over the next decade or two.
EVs Are (Still) Coming
The first step in our investment process is to identify and understand secular trends. We want to be on the side of the major secular trends.
There are chronic misunderstandings and uninformed rhetoric about the future of EVs. Here's what I know:
- government incentives are in place.
- car companies have committed billions in capital.
- supply chains are getting massive investment.
- adoption is happening at accelerating pace in developed nations.
Almost all of the zero-emissions vehicles are battery powered EVs. If plug-in hybrids are included (led by Toyota), that number exceeds 41 million. 2023 sales numbers compiled by research firm Rho Motion noted that BEV and PHEV sales rose 20% year-over-year with BEVs representing 70% of sales.
In the U.S. car sales exceeded 10% of car sales as of November 2023. Light Trucks and Light Duty Vehicles both approached 9% of sales.
In a newly published paper from the Università di Pisa, ITALY , data analyzed from the IEA, International Organization of Motor Vehicle Manufacturers, Eurostat and other organizations demonstrated that EV adoption has entered a new phase of exponential growth.
Exponential curves like these are usually associated with moving from early adopters to mass adoption. It is not dissimilar to smart phone adoption which took about a decade for mass adoption once it was past the early adopters phase.
EVs appear to be getting closer to the mass adoption phase. I discussed how this would look after covering the Consumer Electronics Show in 2020.
CES 2020: EVs Could Dominate New Car Sales By 2030
In that article, I stated that EVs would make up 50-80% of new car sales by 2030. The current growth curves certainly point in that direction. The next phase of EV development looks set to accelerate in 2026-27 as a number of things happen:
- Intel ( INTC ) and other semiconductor companies bring new fabs online to supply far more semiconductors from 2025 onward.
- New lithium supplies and processing come to market from 2025-2030.
- EV supply chain development continues to expand and normalize.
- Battery development continues to improve efficiency and reduce toxic metals requirements.
- Ford and other manufacturers bring new factories online from 2025-2027 for new upgraded EVs, read as better range and lower price.
- Mileage standards make it virtually impossible for ICE vehicles to satisfy fleet mileage rules.
- The idea of fleet mileage requirements necessitating a major shift in auto manufacturing and sales in 2026-7 was publicly discussed by auto company executives at CES 2020. So it is not a new idea and their planning has been geared towards it.
I have been projecting for members of Margin of Safety Investing since 2020, that mass adoption of EVs would hit in the 2026-7 time period. Ford has partially confirmed that time frame by committing to make manufacturing mostly EV in Europe by 2027 and by 2030 in the U.S.
Step 2 in our investment process is to identify whether or not government and Federal Reserve policy are on the side of a company.
We know that there are large subsidies for the EV industry. We also know it is likely that the Federal Reserve has ended its tightening cycle and is moving into a loosening cycle.
Ford Fundamentals
The third step in our investing process is to drill down into company fundamentals.
Before I begin with a brief fundamentals discussion, let me start by letting you know that I do not do forensic accounting anymore. This is despite after 30 years of investing, concluding that investing requires forensic accounting.
So, why did I quit doing it myself? Two things: time and mistakes.
Simply put, doing proper forensic accounting for one company with spreadsheets can take days or maybe weeks. And, as I am human and not too arrogant to admit, I will make mistakes. That usually costs me money and I hate that.
As a result, I use a few AI-driven services now, two that cost over $10k per year and another that is free called ISS-EVA. If you have a Fidelity account, I suggest checking out ISS-EVA research reports. I like comparing the findings of the 3 services I use.
All that is not to say that I am not a deep diver. I actually read SEC filings with the help of an AI (sensing a trend), investor relations presentations, industry journals, competitors materials, analyst reports and institutional investor presentations from conferences.
I am doing my best to follow famous investor Jimmy Roger's advice.
Let's take a look at Ford debt, which often gets breathy angst driven attention from the underinformed. For a summary of Ford's current financials click here.
Ford currently carries a shade under $20 billion in typical long-term debt, however, their debt through the finance division is another $75 billion. The finance division debt is related to vehicle financing of loans and leases.
Ford's current cash and short-term investment position is about $30 billion. This implies that the long-term debt is not much of a problem if the company remains profitable.
Receivables and payables roughly wash out, with a positive gross margin for Ford of about 14%, which is among the highest in the industry. Their net margin though, is below 4%, which represents the high cost of transitioning from a pure ICE business model to mostly EVs.
Indeed, Ford CEO noted this when he announced an acceleration in transition plans in 2021 and 2022, lamenting the cost of operating both ICE and EV.
The real debt risk at Ford stems from the potential for mass defaults, beyond allowances, on their financed vehicles. Ford's risk in a recession increases dramatically and the cyclical nature of the economy cannot be ignored when making such cyclical investments.
Ultimately, an investment in Ford rests on whether you believe that the transition from ICE to EV, with the major ramp up from 2026 to 2030, will be successful.
If you believe as I do, that Ford will navigate this transition well, then net margins might have reached a low point and should start to rise significantly from 2026 going forward.
Ford's Brand Edge For Future EV Sales
The global automotive industry is heading towards $3 trillion in annual revenues. Ford is currently 5th in revenues. As sales flip to EVs the next 3-10 years, Ford has a path to becoming 3rd in overall sales.
Long-term, Ford could even make a run at Toyota ( TM ) for 2nd and even has a chance to unseat Volkswagen (VWAGY) for #1 to become the real people's car.
In the world of ICE vehicles (internal combustion engine), Ford would not have much chance to improve its standing. The proof is in its long-term position where it has been roughly for a few decades.
However, Ford holds a great brand edge, and not just in America. In 2022, Ford's global market share was 5.0%, with 12.5% in North America, 13.1% in the US, 2.1% in South America, 6.5% in Europe, and 2.1% in China.
Recent news of Ford reducing EV production for the next couple years has created the idea that adoption has slowed. Sales numbers do not demonstrate that. Rather, sales are increasing at an accelerating pace.
I believe this growth in EV sales at Ford means that they will close the gap on Tesla ( TSLA ) by the 2028-30 time frame for EV sales. This owes to their huge lead in overall U.S. auto sales and the likelihood that most traditional Ford buyers will remain Ford buyers when it comes time to trade in (especially if there is another "cash for clunkers" style program in the future as I anticipate).
Simply put, while Tesla dominated early adopters, Ford dominates in built in long-term customer loyalty. Further, and deserved or not, Elon Musk's broad based appeal has clearly taken a hit in the post Twitter era, it is not hard to suppose that will hit Tesla sales growth.
Here will note, but not dive into in a big way, is that Millennials, whom I described as becoming "the Market's Most Important Money" a couple years ago, are into Ford. It has bounced in and out of the "Swaggy Stocks" favorites list. I expect to go forward as well, especially as Ford progresses on EVs.
Ford On The Way To Becoming A "4th Industrial Revolution" Conglomerate
After attending CES 2020 I discussed with members of Margin of Safety Investing that Ford's 4th Industrial Technology was among the best in the world.
Ford was an early investor in 4th Industrial Revolution technology solutions and by early 2020 were one of only about 20 companies with such advanced manufacturing technology. We saw that play out during the Covid pandemic when they were able to answer the call to produce ventilators.
Ford's adoption of 4IR technologies has significantly enhanced its manufacturing flexibility, allowing the company to quickly adapt its production lines and processes to respond to changing demands or situations.
In Ford's 2023 Integrated Sustainability and Financial Report you can read about their many leadership positions in tech. These include:
- Smart Manufacturing
- 3D Printing
- Digital Twins
- Advanced Analytics and AI
- Connected Vehicles
- Supply Chain Digitization
- Customer-Centric Digital Solutions
The point of this section is not to cover all of Ford's technology though. Rather, I want to point out two things. First, Ford is not Tesla's inferior in technology. I would argue they are very much on par.
Second, Ford has a depth of relationships, see the ventilators which they collaborated with GE and a smaller company, to take their technology and manufacturing prowess into other businesses.
There are two avenues for Ford to expand its manufacturing footprint. The first is to collaborate with other companies at the other company's facilities. The second, and more attractive, is to use freed up internal combustion engine car plants for other ventures, either on their own, or jointly, as in the case on the ventilators.
There is a synergy between the shift to EVs and Ford's 4IR tech. EVs use about half as much floor space as ICE vehicles, so Ford will have excess real estate which they can repurpose or sell.
Nobody is assigning any value to Ford expanding to other business lines, despite having seen them do it on short notice already. Finding companies with parts that the market assigns no value to was a favorite Charlie Munger approach.
Another example of Ford's technology leading to new business opportunities is the recent Virtual Power Plant venture called VP3.
Per Power Grid International, " Initial funding of the VP3 effort was made possible by General Motors and Google Nest and founding members include Ford, General Motors, Google Nest, OhmConnect, Olivine, SPAN, SunPower, Sunrun, SwitchDin and Virtual Peaker."
Ford's Real Estate Value Ignored
In addition to ignoring Ford's top of class manufacturing technology, investors are completely ignoring Ford's real estate value. Ford actually has a division dedicated to managing real estate called Ford Land.
Ford Land manages and overseas:
- Manufacturing plants.
- Office spaces.
- R&D facilities.
- Commercial Real Estate.
- Sustainability initiatives.
In a country with a shortage of industrial and residential space, Ford is likely to see opportunities in coming years.
The first is to sell or transform ICE plants into other sorts of manufacturing facilities, as noted above, or to sell them creating cash to reduce debt or to invest.
Secondly, as we are seeing in the office sector in general, Ford can play a role in transforming office space into residential or multiuse.
As someone who has a side hustle in private equity to build both residential and industrial space, it is interesting to think about what one could accomplish with bigger spaces and more money. Ford has that opportunity.
Ford's Future Dividends And Buybacks
Ford is one of the companies that needed to cut its dividend during Covid. This underscores the sensitivity to recessions that Ford has.
When Ford brought its dividend back, it was essentially a reset to long-term affordability of the dividend. Here is Seeking Alpha's summary:
Note the low payout ratio.
I would not expect the dividend growth rate to be higher than the 4.56% 5-year growth rate. In fact, I would anticipate the dividend growth rate is about half of that. Why? The company has stated they will favor share buybacks.
The idea of buybacks gets a lot of grief from many rhetorically gifted politicians and people posting to social media from their cell phones about the ills of capitalism. However, for investors, buybacks are among the best things going after a growing business in the first place.
Buybacks reduce share count, which is supportive of price, and reduce total outlays on dividends letting that money fall back to the balance sheet for other uses, like potentially, even more buybacks.
Charlie Munger said to invest in the companies that cannibalize their own shares, I agree. Let the buybacks flow for companies I invest in.
Ford Stock Technical Look
The fourth step in our investing process is to look at the technicals and quantitative data for our favorite companies. Again, before I start, let me interject, technical and quantitative analysis is a signal, not a set rule.
That is, technical analysis gives you hints, sometimes stronger than others, often incomplete and sometimes outright wrong. Anyone who swears by one method of technical analysis or claims some form of technical analysis is "the best" and then tells you how smart they are to know that, isn't that smart.
One of our technical analysis approaches is to use a volume weighted, AI assisted (ahem) version of Elliot Wave analysis.
One of my technical analysts, Shooter, sees a big rally for Ford coming. He has it in the "buy any dips" category with big support in the higher single digits.
My analysis strongly leans on where the "big money" flows into and out of stocks. Very Wyckoff Method. This Econ 101 stuff for supply and demand for shares.
You can see on the left side of the chart that interest dries up for selling in the upper single digits and then big buyers come in below that. Over time, for good companies, that area tends to rise. So, I have set my "bottom fishing price" at about $10 where you can see a big shift of interest.
Ford is close enough to the bottom fishing price and far enough below the next resistance line to be a slow accumulate right now and a buy the dips stock.
Again, no analysis is perfect, but putting all 4 pieces of our investing process on your side, you can see excellent results.
“ Perfection is not attainable, but if we chase perfection, we can catch excellence .” Vince Lombardi
Scaling Into Ford Stock
I have a half position in Ford stock now. That represents about 2% of net asset value in my accounts. A starter position I consider to be 1/2% to 1%. I intend to add more if price drifts down and intend to get to a full position soon. I am likely to make Ford a double position, 6-8% of NAV, if it falls below $10 again.
To that end, I am selling some $12 cash-secured puts for different months. I collect premium income now and $12 is essentially a "good til cancel buy order" without actually being one. For more on cash-secured put selling for income and for scaling into stocks, follow along as I'll talk more about it in coming articles.
Closing Investment Thoughts On Ford
I opened the analysis by comparing Ford to Lockheed Martin. I hope it was apparent by the 4th Industrial Revolution section why I did that. In case it was not, I will simplify:
Ford is becoming a leader in the massive developing market for electric vehicles, will be able to sell unused real estate to free up capital and has leading 4th Industrial Revolution Technology that will allow Ford to pivot to a broad array of other strategically important reshored manufacturing, including within the military industrial complex.
I rate Ford a strong buy and recommend it for growth investors and dividend investors alike. It is the rare stock that should produce market beating total returns over most 3 and 5-year rolling time periods for the next decade or longer.
For further details see:
Ford Will Be A Top Dividend Stock For A Very Long Time