There’s an auto maker strutting its stuff on Wall Street and it’s not who you think it is. Industry giant Ford (F) has been posting some unseemly year-to-date gains, with the shares skyrocketing 120% in 2021. In fact, such has been its renaissance, the stock currently nests at a peak last seen in 2011.
F stock’s latest upward movement followed a successful Q3 report in which earnings came in almost two times higher than the Street’s forecast. At the same time, Ford raised its full-year earnings guidance, and restored its dividend.
Jefferies’ Philippe Houchois has been impressed with the performance but that is not the only reason for his upbeat take.
“Presenting good numbers helped of course, but we found Ford management on the call more in control of operations and strategy than any time in the past 2 years despite industry uncertainty,” the 5-star analyst said. “Ford is early in an intense cycle of replacing and reviving key product franchise and playing to brand strengths with FordPro.”
What’s more, with supply challenges to the fore and keeping customers “frustrated,” an auto industry recovery should “logically” take place in 2022-23. And while higher prices and rising rates could affect affordability and pose a risk to demand along with “margin pressure from electrification,” Houchois believes these will be “offset” by Ford's product cycle.
The analyst counts “Industry leading product activity and structural cost reductions,” as factors which will help Ford deliver “better than industry earnings.” A much-repaired balance sheet “de-risks the funding of transformation,” as Ford pivots toward the new EV, AV and connectivity paradigm. The balance sheet should also get an additional boost from the probable IPOs of Argo AI and Rivian before the end of the year, companies the auto giant is heavily invested in; the latter, particularly, could be worth more than $5 billion to Ford.
To this end, Houchois rates Ford share a Buy alongside a $20 price target. This figure implies a modest upside of 3%. (To watch Houchois’ track record, click here)
Overall, most analysts feel the shares have soared high enough for now; the $17.53 average target suggests the stock will stay rangebound for the foreseeable future. (See Ford stock analysis on TipRanks)
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Ford (F) is an American multinational automotive manufacturer. I'm neutral on the stock. (See Analysts’ Top Stocks on TipRanks)
Sales UpdateFord's October sales report came in strong, with total sales growing by 12.3% month-over-month. SUVs led the charge with 12.3%, and EV sales also appreciated by an astronomical 195%.
The strong October report arrived shortly after the company released its third-quarter financial results, where it beat revenue estimates by $410 million and earnings per share estimates by $0.24.
Concerns Moving ForwardAlthough Ford's total vehicle sales have performed well, it has experienced a decline in U.S. sales of 4%. This comes with a decrease in total U.S. auto sales of 49% since April.
The U.S. has been plagued by high inflation as disposable income and supply-chain bottlenecks increase. Supply-chain hiccups persist, but disposable income has decreased by 21.34% since March, and these two data points combined could cause a further slowdown in U.S. sales.
Furthermore, Ford sells nearly a quarter of its vehicles in China, where there are concerns regarding GDP growth due to hard-line economic policies drawn by the Chinese government.
Other regions around the globe, such as the EMEA, are also facing certain systemic challenges due to the pandemic. Thus, I believe there's no way that vehicle sales growth in a post-stimulus world will persist.
Overvalued and OverboughtMetrics for Ford stock are in the red zone. The stock's trading above its 5-year average price-to-earnings and price-to-sales ratios by 46.9% and 99.3%, respectively. Automotive sales are cyclical, and these elevated numbers suggest we're at or near the top of an expansionary cycle.
There are many who claim that the robust EV sales growth and its investment in it will send Ford into a new dimension. However, CapEx has declined by 7.69% year-over-year, indicating that a lesser proportion of the company's earnings is getting invested across product segments.
Ford stock is overbought. Many investors have gotten caught up in current sales numbers and the EV hype. As a result, the stock's RSI (Relative Strength Index) has risen above 70, which is considered as the overbought threshold.
Wall Street's TakeTurning to Wall Street, Ford has a Moderate Buy consensus rating, based on eight Buys, three Holds, and two Sells assigned in the past three months. The average Ford price target of $17.54 implies 8.6% downside potential.
The latest consensus has been somewhat divided, with Jeffries upgrading the stock to a buy with a price target of $20, and Nomura downgrading the stock to a sell with a $13 price target.
Concluding ThoughtsAlthough Ford has done amazingly well year-to-date from a business and stock perspective, there are telling signs that the momentum is slowing.
I believe investors have gotten caught up in the now instead of looking at what's ahead in Q4 and 2022. I'm not yet bearish on the stock, but I'm definitely no longer bullish.
Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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