Why Ford Stock Looks Attractive At $10

Ford stock (NYSE:F) fell by close to 8% on Tuesday, following the company’s Q3 earnings report. Now revenues were better than expected coming in at $43 billion, up 5.5% year-over-year, earnings stood at $0.49 per share, slightly ahead of estimates and up $0.10 compared to last year. However, Ford’s guidance for the full year was disappointing, with the company projecting operating earnings of about $10 billion. It had previously guided between $10 billion and $12 billion. With the current sell-off, Ford stock remains down by about 10% year-to-date, a sharp contrast to fellow U.S. auto giant GM (NYSE:GM) which has gained close to 43% over the same period. Despite the stock’s struggles, we think there is room for upside. Ford has demonstrated consistent financial performance, with consistent growth in revenue and cash flow. Additionally, the stock is attractively valued at just 6x 2024 consensus earnings. This creates a clear disconnect between the company’s relatively strong fundamentals and its lackluster stock price.

While Ford’s stock has risen over the past three years, the returns have been volatile. The stock surged 137% in 2021, fell 42% in 2022, and has gained 16% in 2023. Compared to the broader market, Ford’s performance has been much more erratic. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

We believe Ford stock has some upside potential. We value Ford stock at about $13 per share, which is around 30% ahead of the current market price. See our analysis on Ford Valuation: Expensive Or Cheap for more details on what’s driving our price estimate for Ford.  For more information on Ford’s business model and revenue trends, check out our dashboard on  Ford Revenue: How Ford Makes Money. Several factors could support a rebound in Ford stock.

Riding on strong truck demand

One primary driver is the continued strong performance of its truck division. Overall truck sales increased 6% in the third quarter with the F-Series pickups up 4.2%, with a 12% increase in Super Duty vehicle sales, a 105% increase in Lightning electric pickup, and a 64% increase in the hybrid models. Trucks, with their higher margins, remain Ford’s most lucrative segment, and sustained strength here could support profitability in the coming quarters. The recent monetary easing in the U.S. could also bode well for automakers like Ford by reducing financing costs. The Fed’s 50 basis point rate cut in September marked the first interest rate cut in close to four years. With the benchmark federal funds rate standing at 4.75% to 5% post the cut, there remains room for the central bank to lower interest rates further, potentially helping automotive demand. Check out our analysis of other ways to profit from the Fed’s next move? 

Fixing quality issues

Ford earnings have been impacted to an extent by an increase in warranty repair costs amid issues with cars built in 2021 or earlier. Ford has faced multiple quality issues with its vehicles in the past years driving up repair-related costs. Moreover, these costs are sometimes recognized suddenly, without warning, leading to weaker-than-expected results.  Over Q2 Ford saw a $800 million spike in costs warranty expenses, although the company indicated that warranty costs in the third quarter were slightly lower than they were a year earlier. This has proved an overhang over the stock as well. Now Ford is working on improving the quality of its vehicles, with the company noting that it was now testing vehicles up to failure to discover quality problems. Although the process could take time to reflect on warranty cost improvements, it should positively impact Ford’s earnings in the coming years.

EV strategy could pay off

Ford’s transition to electric vehicles has been anything but smooth. Its Model E division, dedicated to EVs, posted a significant operating loss of $1.2 billion in the last quarter. To fix this, Ford has revised its electrification strategy, shifting focus from larger electric SUVs to a more compact next-generation EV platform, with larger vehicles now incorporating hybrid powertrains. This balanced approach, blending gas, hybrid, and electric vehicles, allows Ford to tap into shifting consumer preferences without overextending on costly EV development. Slower EV adoption across the industry may also offer Ford a window to bolster profitability in its conventional segments while refining its electric vehicle offerings. Meanwhile, the hybrid market is gaining traction, with Ford’s hybrid sales surging 38% in the most recent quarter.

Capital return program 

Ford’s potential to boost its capital return program could also add further to shareholder value. The company’s cash flows have been strong. While free cash flows for 2023 stood at about $6.8 billion, the company is guiding for adjusted free cash flow of between $7.5 billion and $8.5 billion for this year. Ford has been paying dividends of about $0.15 per quarter, along with a special dividend of $0.18 in March. Given the robust cash flows, there is potential for additional special dividends. At present, Ford plans to distribute 40% to 50% of its annual free cash flow to shareholders. While Ford has held off on share repurchases, unlike its cross-town rival GM, it could eventually do so, given its undervalued stock and considerable cash position ( nearly $28 billion).

While investors have their fingers crossed for a soft landing by the U.S. economy following rate cuts, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

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