Why We Believe This Stock Is Heading To 27$/Share (F)

Monday, 20th Dec 2021 8:00 AM EST

By Mike Le

After the most-awaited event of December, the Federal Reserve's FOMC meeting, concluded on Wednesday, the stock market has seen confusing actions. The Federal Reserve tapering and changing monetary to the less accommodative side means we're entering a new era of investing, where not everything will work (especially see last week's post about real earnings vs no earning stock). We believe that in order to come out on the winning side, we have to be responsible and picky stock-pickers, positioning in the highest quality stocks with real earnings and earnings growth. Because of that, we will start a series of reviews/ updates on our core portfolio holdings. There's nowhere better to start than the biggest, most successful stock pick of my career, that is Ford Motors Company (F). 

Investment Thesis on Ford Motors (F) 

This was what we wrote in the Spring of this year when we started a position in Ford:

"Our bullish thesis on Ford is mainly predicated on the turnaround led by CEO Jim Farley and his new leadership team. Whether it be through restructuring underperforming parts of the business (like slashing India production), and getting out of low profitable vehicles, or addressing a roughly $2 billion headwind related to warranty costs, we believe Farley and his management are executing in building a new Ford that grows profitably and generates sustainable free cash flow. We also think Ford's electric vehicle business is underappreciated. They have transformed their most popular and quite frankly, America's most popular F-150, Mustang and E-Transit Cargo Van into electric versions. To top off, Ford has ~10% investment in Rivian (RIVN), which it can sell at any time and add the gains to its balance sheet.

We have a long-term price target of $25 which reflects a smooth transition to the all electric F-150 (Ford's most profitable car), potentials for autonomous driving and a subscription-based service, which all will give way to a multiple-rerating in the stock (we want north of 15x forward earnings). In the short term, Ford is expected to earn 1.98$ per share next year based on consensus (FY 2022), so given a 10x forward multiple, we think shares of Ford should be trading near 20$ per shares. Buyers should feel comfortable to buy on pullbacks when shares trade below 10x, meaning below $20/share."

Interview with Jim Farley - President and CEO of Ford Motors

Jim Farley (President and CEO of Ford) recently went on CNBC and answered questions about the future of the company. We want to report key interview statements here for you, and we believe they statements are great guarantees for what the company will be able to do in the future.

Growing Of A Stellar Balance Sheet

• Dividend reinstatement: "We have a big cash position. The company is getting healthier, so we thought it was the right thing to reinstate the dividend. We want to go higher."

• Debt consolidation: "We have the green bond that came out. We've lowered interest rates. We took on debt during Covid but we're now paying that debt back."

Product Demand, Production Capacity

• "The F-150 Lightning, America's best-selling vehicle, everyone loves the electric version, they haven't even driven it yet. We have to stop reservation because we got too many. We stopped at 200,00 orders. We capacitize at 70-80,000 units, but we're trying to double it. Don't bet against Ford when we have to increase capacity. This is what we do."

• Semiconductor shortage: "We'll get the semiconductors, that's the matter of prioritizing the EVs over the ICE vehicles. The issue is batteries."

• Batteries: "We're in the middle of doing that. As a big company, we're not used to making commitments that we don't have all the answers to. But we think we can do it. In 24 months, we're going double the production for our EVs. We've gotten a lot of battery commitments out of our Georgia factory."

• "We really think we can do it. My name is on the line."

Roadmap To Become The Next Tesla

Ford is a century-old car company that has a ~$80 billion valuation. Tesla, a newer player that's 1/10 younger than Ford, has 10x the valuation of Ford. Jim Cramer asked Farley, how does he change that mismatch.

• "The only way we're going to change that is we have to scale our electric business so we're competitive with them on scale, or beat them, in more profitable segments like pickup trucks and commercial vans. Scaling is the first step, we have the road map. We now have the talent like Doug Field who came from Apple and Tesla."

• " Most important is that we have to make money on the EVs, more money that what we make on the ICEs."

• "I'm a racecar driver. Second place is the first loser. That's how I look at business."

•  "Our investors are betting on this company. As we go battery electric, we can really re-invent the brand. We've already done that with the F-150 Lightning, now we have to develop more vehicles that are just as good, and we have to do them profitably."

Rivian Investment

How do you monetize the Rivian Investment:

• "We own 12% in Rivian, doing the math brings the worth to about 10 billion. But this is not the management that just takes the money and invest in random things. We know our plan is to scale and make money on both our ICE and EV business. When we see opportunities to accelerate that, either by making acquisitions *, or making investments in battery plants, we will do it. Right now it's too early to tell what we're going to do, but whatever we do, we have to return the cost of capital, or more, back to our shareholders."

* the interesting part we picked up from the interview was that when Jim Farley was starting to say "making acquisitions" he froze and we think purposely tried to avoid saying this. That leaves us to speculate that Ford is in the process of acquiring some other company. It'd not be a surprise, going back to the fact that Ford has a lot of money on hands, especially this $10 billion from Rivian. 

Price Increase For The Electric Mustang Mach-E (Source: Fox News)

The Ford Mustang Mach-E has been a strong-seller this year, second only to the Tesla Model Y among electric SUVs in the U.S.

Last week, we saw reports of the price increase for the Mach-E. If Ford can pass this price hike without any slow down in sales, this shows their incredible pricing power. this is going to be one of the main investing themes for 2022, is how can companies pass on price increases to customers, and from there increase their profit margins. We believe Ford is at the beginning of this process, and management will surprise investors (and analysts) with the ability to beat both the top and bottom lines. We've seen a multiple re-rating for Ford in 2021, there's no reason for the process to stop in 2022.

Revision Of Earnings Estimates, Higher Valuation Multiple - 27$/Share in 2022

All of these initiatives/actions are meaningless without context - stocks go higher when earnings can go higher. As we have said multiple times, analysts currently have 2022 estimates for Ford at 1.98$/share consensus. Given the current share price of 19.8$/share as of close on 17th Dec, Ford is currently trading at 10x forward earnings, a reasonable multiple for us. However, this 1.98$ average has been quite outdated, before Ford announced multiple key initiatives/actions, including doubling of EV production capacity (especially doubling America's best-selling F-150 Lightning), value of the Rivian investment, retirement of debt, and EV credits from President Biden's Build Back Better Agenda. What we would like to see from analysts in the near future is an increase in their earnings estimates for Ford. 

And in just a couple of days we will enter 2022, when the term "forward earnings multiple" is applied to 2023 earning estimates. Not a lot of estimates are out at the moment, but within 4 that are out, the average has Ford earning 2.26$/share in 2023, with the highest estimate at 2.7$/share and the lowest at 2.0$/share. However, as we've said, we expect more analysts to come out and either provide and/or raise their estimates on Ford.

Certainly that momentum of analysts raising price targets on Ford has been building. Just last week, Ford received price target boosts from two analysts. Wells Fargo Securities analyst Colin Langan maintaned overweight rating on Ford shares, hikes the price target from $19 to $25. His estimate for Ford's 2022 earnings is 2.30$/share, and for 2023 is 2.70$/share. According to the firm, the price target raise is based on raised 2022 EPS estimate and a higher valuation multiple. The increased multiple reflects their optimistic view of the multiyear recovery in auto. The firm also said they prefer Ford over GM given the restructuring benefit. Additionally, Barclays analyst Brian Johnson reiterated an overweight raiting and raised his price target on Ford from $18 to $23. 

Bottom Line

Let us make it easy for you. We currently believe a fair forward earnings multiple for Ford is 10x, and ideally we would want a 15x but that's too optimistic. That means what you have to do is see what the estimates for the next year's earnings are, and apply a 10x multiple to arrive at the price target where Ford shares are going to. Let's say we're in 2022 already, and given that Ford's 2023 EPS estimate is 2.70$/share (according to the Wells Fargo analyst), you will have a 27$ stock. If you buy today at 19.8$, you're going to get a 36% gain in 2022. It's that simple.