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Investing, Stocks  | March 25, 2019

Shares have U.S. auto giant Ford (NYSE:F) have been in a secular decline for several years now. Five years ago, this was a $17 stock. Today, Ford stock trades hands at $8, down more than 50% over the past five years while the S&P 500 has rallied over 50%.

There are many reasons why Ford stock has underperformed the market by 100 points over the past five years. Those reasons include an unusual drop in car ownership rates, broad weakness across the entire U.S. auto market, and Ford pivoting too slowly into the secular growth electric vehicle (EV) space, among other things.

The sum of those headwinds has caused Ford’s sales to fall flat, margins to compress, and profits to drop. That triple whammy has led to a 50% haircut in Ford stock.

Most of these headwinds will persist. Car ownership rates will continue to drop as the sharing economy grows in popularity. The U.S. auto market will consequently remain weak. Ford will continue to cede market share to more EV-focused peers like Tesla (NASDAQ:TSLA).

As such, Ford’s growth fundamentals going forward aren’t great, and you won’t see Ford re-take its $17-plus five year highs anytime soon. But, Ford stock is too cheap for its own good, and the growth fundamentals are good enough to support a rally towards $10 in 2019.

Consequently, Ford stock looks good here. It’s way too beaten up, and as Ford pivots into the EV space and improves profitability, the stock should rebound nicely in 2019.

Ford Faces Secular Challenges

Make no mistake about it. Ford faces some serious secular challenges over the next several years. Those challenges include:

  1. Car ownership rates will continue to drop as the need to own a car for urban residents drops thanks to the rise of the sharing economy and ride-sharing services. This will shrink the overall U.S. auto market, and have an adverse impact on Ford’s unit sales.
  2. Ford’s market share in that shrinking auto market will drop, as EV competition ramps and competitors like Tesla expand their product line-up and gobble up share in the auto market.
  3. Average sales prices on vehicles will rise, but gains will be capped by competition-related and share erosion headwinds, and that will cap potential margin upside, too.
  4. Amid all these challenges, Ford’s giant debt load will become increasingly unattractive.

As such, Ford’s growth outlook over the next several years isn’t great. Unit volumes will drop. Market share will drop. ASP growth will be limited. Margin expansion will be limited. Profit growth won’t be great.

With all those headwinds, it’s easy to see why investors don’t want to buy Ford stock here and now. But, the bear thesis on F stock ignores one critical element that makes all the difference: valuation.

The Stock Is Too Cheap

Ford is slated to do about $1.20 in EPS this year. Ford changes hands around $8.50. That means it is trading at just 7-times forward earnings.

That’s too cheap for Ford. Sure, there are a bunch of headwinds here which will keep revenue and profit growth relatively muted over the next several years. But, that doesn’t mean there will be no growth. Instead, Ford will increasingly pivot into the EV space and grow share in that space. This pivot should help keep revenue growth in the low single-digit range over the next several years.

Simultaneously, Ford will downsize operations and cut costs, which should help push EBIT margins materially higher over the next several years from today’s depressed base.

Overall, despite secular challenges, Ford still projects as a low single-digit revenue growth company with tepid margin upside over the next several years.

Modeling that out, it becomes clear that Ford can do about $2.50 in EPS by fiscal 2025. Based on a historically average 7 forward multiple, that equates to a fiscal 2024 price target for F stock of $17.50. Discounted back by 10% per year, that equates to a fiscal 2019 price target of nearly $11.

As such, upside in Ford stock looks good here, thanks both to an anemic valuation and revenue and margin upside potential over the next several years.

Bottom Line on Ford Stock

Ford faces big challenges in the coming years. But, all those big challenges are already priced into the stock. What isn’t priced into the stock, however, is potential revenue upside through an EV pivot. Potential margin upside through cost-cutting measures also isn’t priced in.

As such, at current levels, all the bad but very little good is priced into Ford stock. That makes for a favorable set-up for bulls.

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