Thesis – Sticking With Our Contrarian Methodology
Those who have followed us for a while will know that we’ve been bearish on Ford Motor Company’s (NYSE:F) stock for most of the past year. Our rationale was based on cyclicality; in other words, stocks and companies’ performance aren’t a linearly growing concept; instead, they oscillate.
However, as of today, we officially change our outlook on Ford stock as we believe it presents a good entry point. In essence, we’re as contrarian as we were with our bearish calls.
Many might dispute our stance, as Ford stock is on a downward trajectory amid a risk-off investment environment. And that’s okay, as the financial markets are essentially a sphere that consists of disagreeing adults who believe they’re smarter than one another. However, I ask that you consider our argument before opposing it.
Let’s get into a few of our key findings on Ford stock!
Ford generates more than 20% of its sales from Europe. Thus, it is needless to say that the Russia-Ukraine war dampened investors’ outlook as factors such as an EU energy crisis and supply chain congestion played into a bearish argument on Ford stock. However, fossil fuel prices have abated in recent months, prompting analysts to upgrade their economic outlook on the Euro region. Most notably, Goldman Sachs upgraded its 2023 economic outlook to 0.6% regional GDP growth from its previous 0.1%.
Given an improved economic outlook, analysts anticipate discretionary items to benefit as renewed consumer confidence could play its hand. Therefore, this translates into a tailwind for Ford.
Although Ford’s European segment’s margins and sales stalled in its second quarter, its third quarter displayed a pivot. Additionally, the company’s regional market share reached 15% providing its Euro segment with economies of scale possibilities.
Passenger car registration in the EU rose during December, providing a leading indicator of demand for Ford, considering its substantial market share. We think this is a regional inflection point that could bolster Ford’s widespread valuation.
North American Sales Are At A Pivotal Point
If you remember correctly, we pointed out the U.S. yield curve in previous articles and correlated it with Ford’s prospective sales. Although we received much criticism from various readers, we were right and thus continue to stand by our vantage point.
The short end of the yield curve is still sloping downward. However, inflation has topped out, suggesting slower interest rate hikes might be in the offing, in turn abating the need for significant future rate decreases. Sure, sales might recede in the short term while inflation is being wound down. However, we want to enter a bullish outlook before sales reroute (be before the fact, not after).
From an idiosyncratic point of view, Ford’s F-Series (Trucks) has established itself as an industry outlier, exhibiting immense popularity among consumers. Ford’s F-Series is the best-selling Truck in the U.S., adding segment tailwinds and possibilities of cross-sales increases.
Ford’s business intelligence sets it apart. The company has tapped into the U.S. consumer base decade after decade. Thus, its product-driven approach stands head above shoulders.
China Could Act As A Catalyst
Sure, Ford’s sales in China still make up a small part of its revenue mix. Therefore, in isolation, the region’s pandemic lockdown re-openings provide little substance. However, China’s reopening contributes in different ways.
Firstly, China is a prospective market for Ford. Thus, re-openings allow the firm to expand into the area. Additionally, China’s reopening could smoothen supply chains, making for more efficient input costs and ramped-up production for companies like Ford.
Admitting That EV Is A Gamechanger & Credit Integration
Our baseline argument for Ford’s EV integration remains that restructurings are expensive, which is often seen as very unfavorable by investors. Although we still believe that, it can’t be ignored that the company’s 7.6% to 9% industry constant sale surges are adding tremendous value.
Electric vehicles (“EVs”) are receiving excessive generational and political support. Personally, I’ve never driven an EV as I’m a “petrol head.” Nonetheless, it is clear that many younger consumers adore electric vehicles. In addition, political support such as subsidies and tax credits should be considered as they artificially inflate EV sales while chopping away at ICE vehicle demand.
Valuation Remains a Concern
A point of concern is Ford’s valuation multiples. Even though its price multiples have drawn down during the past year, they remain at their cyclical midpoints, which suggests Ford stock isn’t at an ideal entry point. As such, the stock is fairly valued instead of undervalued after its year-over-year selloff.
Further, a simple absolute valuation suggests Ford has limited upside. For example, the expanded P/E formula implies that Ford’s intrinsic value for a horizon ending in December 2023 is $12.98, which is in line with its current market price. Again, this should be considered by investors; however, valuation doesn’t tell us much when looked at in isolation.
- Expanded PE Formula = Normalized P/E x Expected EPS = Stock Price Target
Dividends Are Looking Up
Ford’s current dividend yield is something that caught my eye. Investors have an opportunity to lock in a sumptuous 4.83% forward dividend yield, which could contribute to total return prospects.
On top of that, the stock sports a dividend coverage ratio of 3.99x, suggesting its ability to pass along residual value to its shareholders is well intact. Thus, encouraging us to conclude that Ford’s dividend profile is set for growth and sustainability.
As this is a contrarian article, it has to be emphasized that we are going against the grain of the current economic outlook by setting a bullish rating on a stock that is highly sensitive to the macroeconomic environment. To add, although Ford’s stock has drawn down into a more investable territory, the asset’s price multiples remain in line with their cyclical averages.
Lastly, as mentioned before, Ford’s EV pivot presents lucrative opportunities. Nevertheless, restructurings are generally expensive and have noticeable medium-term effects on shareholder value, which investors often dislike.
We have decided to change our outlook on Ford Motor Company’s stock on the premise of a pending recovery. We believe lightened economic circumstances in the Eurozone and awaiting calmness in the U.S. economy might encourage consumers and investors alike to reignite their interest in Ford. Moreover, re-openings in China could smooth supply chains and input costs, concurrently instilling confidence in cyclical investors.
Ford Motor Company’s valuation multiples are yet to dip below their cyclical averages. However, future earnings increases could re-center the stock’s price multiples. Additionally, a significant year-over-year price drawdown allows market participants to lock in a compelling dividend yield by investing in Ford stock.