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Many market watchers believe that stock valuations are stretched, given that the S&P 500 Index (SPX) has surged by about 340% from its bear market low in March 2009, and traded today just about 2% below its all-time high. Nonetheless, despite their generally bearish outlook on the market, Morgan Stanley recently found 4 stocks that still have the potential to rise by up to 35%, giving them overweight ratings as a result.
These stocks are The Boeing Co. (BA), Deere & Co. (DE), Ford Motor Co. (F), and Emerson Electric Co. (EMR). Morgan Stanley is optimistic about these stocks despite an environment in which “slowing growth and margin pressures keep us cautious on equities and we see downside risk should labor markets weaken,” as they write in a Sept. 9, 2019 report, “U.S. Equity Strategy: Industrials: Strategy Sector Views + Analyst Stock Picks.”
Significance for Investors
Summarized below are Morgan Stanley’s comments on Boeing, Deere, and Ford.
Boeing: price target $500, or 35.3% above the Sept. 10 close. Boeing is their top pick in aerospace and defense. The grounding of the 737 MAX actually “creates a buying opportunity in a steady aerospace cycle.” The main positives are expected upgrades to the 737 MAX, an A-rated balance sheet, and an “attractive valuation” given a projected 2021 FCF yield of about 10% and forecasted FCF growth of about 10-15% thereafter. The current forward P/E is about 16, per Yahoo Finance.
Deere: price target $177, or 7.9% above the Sept.10 close. Farmer sentiment is stabilizing, Deere’s market share is rising, and a cost savings program should increase profit margins. Morgan Stanley forecasts EPS growth of about 10% in fiscal year 2020, and views the shares as attractively priced at about 14x estimated fiscal year 2020 EPS.
Ford: price target $12, or 27.4% above the Sept.10 close. The big positives are: restructuring actions, particularly in Europe; strategic actions, such as a partnership with VW, deconsolidating the Ford Mobility ride share division, and emerging plans for the electric vehicle market; and an enhanced product mix, with new SUVs, a new F-150 pickup, and exiting the lower-margin car market.
However, Ford’s debt has been downgraded to junk bond status by bond rating agency Moody’s Investors Services. The downgrade was announced after the close on Sept. 9, and Ford shares slid by 1.3% on Sept. 10, recovering after being down by as much as 5.2% during the day. “The Ba1 ratings reflect the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan,” Moody’s report says, as quoted by Barron’s.
Ford still has investment grade ratings from S&P and Fitch, so its borrowing costs are unlikely to jump significantly, Barron’s observes. “Ford still has more than ample liquidity, with $23 billion of cash on its balance sheet plus an $11.4 billion revolver,” notes Dan Levy, an analyst with Credit Suisse, as quoted in the same article. Barron’s notes that Ford’s restructuring plan is nothing new, having been underway for some time.
Even given the positives cited by Morgan Stanley for these stocks, should the economy or the stock market suffer a deep decline, it may be difficult for them to swim against the tide. In such an environment, being down less than the market as whole would represent outperformance, but not a particularly desirable form of outperformance for most investors.
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