Ford’s (NYSE:F) earnings may have gotten lost in the shuffle , but as it turns out, Facebook (NASDAQ:FB) wasn’t the only company that reported disastrous earnings on Wednesday, July 25. Ford’s second-quarter earnings have plunged Ford stock into single-digit territory for the first time since 2012.
The quarter wasn’t great. Revenues topped expectations. But earnings missed expectations. The full-year profit guide was also cut dramatically. Margins are eroding. Profits are falling. Management announced $11 billion in EBIT restructuring charges, but didn’t give any specifics on it.
All in all, it was an ugly quarter that left investors with more questions than answers. Net result? Ford stock dropping below $10 for the first time in six years.
I’ve been a big bear on Ford stock for a while now. The company is facing some big, long-running headwinds which challenge the structural framework of the business. But, even a bear knows that Ford stock has some value in the long run.
Below $10, that value is starting to be underappreciated by the market. I’m not rushing to buy the stock here and now. But, if it keeps dropping deeper into single digit territory, I think the value prop on Ford stock becomes compelling.
Here’s a deeper look.
Ford’s Quarter Underscores Long-Term Challenges
My bearishness on Ford stock has been largely predicated on three major headwinds, all of which should negatively affect sales and margins over the next several years. Those three headwinds are as follows:
- Higher interest rates are cooling off the auto market (higher rates mean higher borrowing costs, and that deters buying).
- The rise of the sharing economy and ride-sharing apps implies lower car ownership rates in the future (the more Uber is available everywhere, the less reason there is for me to own a car).
- The electric vehicle revolution implies bigger competition and lower market share for Ford (for all its greatness, Ford isn’t known as the go-to electric vehicle company, and consequently, the company will find itself with lower market share over the next several years as electric vehicles become the norm).
Ford’s second quarter numbers underscore that these headwinds remain.
Pretty much across the board, vehicle shipments were down in every geography. That is mostly due to higher interest rates. But, over the next several years, growth will remain depressed due to ride-sharing and electric vehicle adoption.
Meanwhile, margins are getting killed, and profits are dropping big time. A lot of this has to do with lower sales volume and stiffer competition.
Overall, the quarter wasn’t very good. Moreover, the numbers emphasized that the long-term outlook on Ford stock is challenged by some sizable headwinds which will keep revenues and profits depressed.
Ford Stock Can Head Higher From Here
Having said all that, this is Ford we are talking about. Ford is a big company. It is an iconic company. There is a big moat. There is a long track record of success. And, millions of people globally love the cars, and are lifetime customers.
Thus, Ford stock isn’t going to zero. This stock has value in the long-run as the company continues to sell millions of cars, albeit at a slower rate than before.
From 2009 to 2013, when the auto market was bouncing back from the Recession, Ford sales grew at a 6% clip. From 2013 to 2017, as the auto market remained strong but was cooling, Ford sales grew at a 2% clip. Now, with the auto market weakening, sales dropped 2% last quarter.
Over the next five years, I think Ford can grow sales by roughly 1% per year, representing a slowdown from prior growth rates but also acknowledging potential growth through higher average selling prices. During that stretch, emphasizing higher margin North American sales should allow pre-tax margins to shake out slightly above their long-term average of 5%.
Conservatively assuming 1% annualized sales growth and pre-tax margins of 5.5%, I think Ford can do about $1.85 in earnings per share in 5 years. A historically-average 7.5x forward multiple on that implies a four-year forward price target of just under $14. Discounted back by 10% per year, that equates to a year-end price target for Ford stock of just under $10.50.
Bottom Line on Ford Stock
Ford stock is facing three huge headwinds which will depress earnings power over the next several years. But, Ford is still a strong company with long-term staying power.
As such, at $10, Ford stock isn’t that interesting. But, at $9 or lower, Ford stock looks like a good “buy the dip” situation.
As of this writing, Luke Lango was long FB, and may initiate a long position in F within the next 72 hours.
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