Automotive giant Ford (NYSE:F) reported mixed fourth- quarter results on Thursday, Jan 24. Revenues slightly beat expectations on a healthy unit mix and North America strength, helping Ford stock rally along with the stock market on Thursday and Friday. But the company’s earnings came in below analysts’ average estimate, the company continued to lose market share overseas, and its margins fell again.
Moreover, the Q4 results indicate that Ford is still facing the same problems that have hurt its results and pulled down Ford stock for several quarters: market share losses outside of North America and margin compression. On a positive note, the company continued to perform well in North America.
Although Ford stock has gained about 5% since Ford reported its results, F stock, trading around $8.80 this morning, remains well below its 52-week high of $12.15.
The failure by F stock to have a huge post-earnings rally makes sense. The quarter was a mixed bag. There were some positives. There were also some negatives. Overall, though, investors’ biggest concerns about Ford stock — market share erosion and margin compression — persisted. As long as those fears aren’t meaningfully eased, Ford Motor stock will have a tough time rallying significantly.
Fortunately, those concerns might disappear in 2019.
There are reasons to believe that Ford’s market share will stabilize in 2019, and that its margins will start to improve. If those positive developments do materialize, Ford stock could embark on a huge rally. Indeed, I think Ford stock could exceed $10 in 2019.
The bull thesis on Ford stock will start to gain traction in 2019, while the bear thesis – which is already fully priced into F stock – will lose steam. That combination will push Ford Motor stock higher.
Signs of Operational Improvement
While the fourth-quarter report was mixed, there were a few signs that things could get better for Ford and Ford stock in 2019. There have also been a few indications elsewhere that Ford and Ford stock will benefit from macroeconomic changes this year. Here are a list of all of those signs:
- Overall, Ford’s adjusted earnings before interest and taxes (EBIT) margins fell 1.4 percentage points year-over-year in Q4, markedly better than the 1.9 percentage point drop of EBIT margins through the first nine months of 2018.
- North America’s adjusted EBIT margins expanded 0.3 percentage points YoY in Q4, markedly better than their 1.10 percentage point drop through the first nine months of 2018.
- The Fed has struck a surprisingly dovish tone in early 2019, indicating that interest rates probably won’t go much higher in 2019. If rates don’t move higher, rate-sensitive parts of the U.S. economy, including the auto sector, should improve in 2019.
- The OECD’s composite leading indicator for China (CLI) has increased month-over-month for two consecutive months (October and November). Over the past roughly 20 years, back-to-back months of CLI improvement after a multi-month streak of CLI deterioration has always indicated that China’s economy has reached a positive turning point.
- Ford is making a big push into electric cars in 2019, and that should help stabilize its market share.
Overall, it looks like the worst may actually be in the rear-view mirror for Ford stock. The company’s margins are improving, while the interest-rate outlook has improved. Trade tensions are easing. China’s economy is showing signs of improving. And Ford is finally poised to benefit from the growth of the worldwide electric-vehicle market.
As a result, 2019 could be markedly better than 2018 for Ford and Ford Motor stock. This year, Ford will likely go from market-share erosion to market-share stabilization, and from margin compression to margin expansion. If those two things happen, Ford stock will have all the fuel it needs for a big rally.
Ford Stock Can Rally To $10
Management’s long-term growth targets are aggressive. In its earnings slides, Ford stated that it will try, over the long-run, to increase its sales faster than global GDP growth and expand its margins to 8%.
Neither of those goals will likely be met. Real, annual global GDP growth is expected to be around 3% over the next several years. After we factor in 2% inflation, it appears that Ford’s guidance calls for 5%-plus annual revenue growth over the long-run, versus 2% in 2018. That’s aggressive, especially amid rising EV competition and ride-sharing headwinds. Consequently, 2% revenue growth seems much more realistic.
Moreover, Ford’s EBIT margins are just 4.4% today. The likelihood of those margins nearly doubling over the long-run amid a slowing economic backdrop is low. As a result, EBIT margins of about 6% seem much more realistic.
The combination of 2% revenue growth and 6% EBIT margins makes $2 of earnings per share of F stock seem achievable by fiscal 2023. F stock normally trades at about seven times analysts’ consensus earnings estimate. Based on that average forward multiple and a 10% discount rate, a reasonable 2019 price target for F stock is over $10.
The Bottom Line on F Stock
For Ford stock to rally in 2019, a few things need to happen. First, macroeconomic conditions in China have to improve; secondly, the company’s EBIT margins have to rise. Thirdly, interest rates in the U.S. have to be flat. Finally, the company’s new EVs have to attract healthy demand.
All four of those things look increasingly likely to happen in 2019. If they do, better-than-expected fundamentals will cause Ford Motor stock, whose valuation is currently depressed, to pop above $10.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.