The last time Ford Motor Company (NYSE:F) stock traded at $20 in June 2001, the dot-com crash was well underway. Yet automakers like Ford were actually doing quite well. The last time F stock hit $30 was at the end of 1999, just before the dot-com crash began. Ford shareholders were winning at a time when most investors were losing.
Since then, there really hasn’t been much to cheer about, though. And $20 per share seems like a distant memory. In fact, Tesla Inc (NASDAQ:TSLA) just surpassed Ford in market capitalization despite producing a fraction of the vehicles.
Could F stock somehow reach the $20-per-share level once more — a nearly 80% climb from here? Anything is possible, but it won’t happen if Ford doesn’t do these three things. And sooner rather than later.
#1: Driverless Cars
Ford announced a $1.2 billion investment in its Canadian operations on March 30. Hidden among the details was $500 million to be spent on an Ottawa R&D facility that will work on many things, including Ford’s development of driverless cars with help from BlackBerry Ltd (NASDAQ:BBRY), whose QNX division is opening an autonomous vehicle test site in the Canadian capital.
This is clearly where the automotive industry is headed, and Ford needs to keep investing in this area — both in terms of money and manpower — if it wants to keep pace with its competitors. Ford CEO Mark Fields stated in 2016 that the company will have a fully automated driverless vehicle for ride-sharing purposes by 2021.
If Ford stock hopes to see $20, it must meet this timeline.
#2: Reduce Debt
A quick scan of Morningstar’s key ratios shows that Ford’s long-term debt is 39.2% of its total assets, lower than any time in the past decade with the exception of 2013 when it was 33.2% of total assets.
While it’s certainly much lower than those scary days back in 2009, when Ford’s survival along with the entire U.S. automotive industry was very much in doubt, it needs to be as lean as it can possibly be.
Back in 2000 when F stock was flying high, Ford’s long-term debt was $98.9 billion, or 34.9% of its total assets. Today, Ford’s long-term debt is $93.3 billion. The big difference between then and now is that Ford generated $1.72 in revenue for every dollar of debt in 2000 compared to $1.63 in 2016.
A 9-cent-per-share difference might not seem like much, but when we’re talking about almost $100 billion, it adds up fast.
#3: Free Cash Flow
At first glance, Ford’s free cash flow looks to be in fantastic shape. In 2016, it generated $12.8 billion, its highest level in the last decade and a healthy 8.4% of sales. However, in 2000, it generated $19 billion in free cash flow, 48% higher than in 2016 and more importantly, 11.2% of revenue.
InvestorPlace contributor Josh Enomoto recently reminded investors that a 5% dividend payout is not enough to merit an investment in Ford stock. I tend to agree. Dividends are nice, but they won’t get Ford to $20. Only higher revenues and profits will do the trick.
The tricky part of growing free cash flow is knowing how to allocate the capital effectively; most CEOs don’t do a good job in this area. Mark Fields would be wise to increase its share repurchases — Ford has spent only $274 million in the past two fiscal years repurchasing its stock compared to $5.8 billion in dividends — because in this instance, with Ford stock viewed by many as either a value play or a value trap, buybacks send a strong signal to investors that its stock is cheap.
Dividends are not the answer. Share repurchases, smart investments in R&D and increased debt repayment are.
The Bottom Line on F Stock
If that doesn’t happen, Ford has a chance. But only if it focuses on generating more from less.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.