I didn’t see it coming — but few likely did. Shares of Ford Motor Company (NYSE:F) are climbing nicely after the company posted an impressive first quarter beat on Thursday afternoon. F stock is up 7% in after-hours trading, with Ford stock clearing $10 for the first time since August.
To be sure, I’ve been bullish on Ford stock since last year – a call that was premature. F stock would hit a nine-year low in December. But as I wrote in January, I thought Ford shares were cheap but would require patience. Dana Blankenhorn wrote this month that investors simply don’t trust Ford anymore — and I didn’t think he was wrong.
In fact, I still don’t think Blankenhorn misread the perception of F stock. But that’s why the blowout Q1 looks potentially so important for Ford, and for Ford stock. It’s the type of quarter that can change the narrative.
And with F shares still cheap, a new narrative can lead to upside well beyond the 7% after-hours gain.
The strength in Ford earnings is somewhat surprising since the company already had released sales figures at the beginning of the quarter. Those numbers looked strong, even with a 1.6% year-over-year decline in units sold. Ford clearly took market share from rival General Motors (NYSE:GM), and showed nice growth in the more profitable truck and SUV categories, as well as at luxury brand Lincoln.
So investors likely expected some level of margin improvement. But even with those expectations, Q1 impressed. Non-GAAP operating margin expanded 90 bps year-over-year to 6.1%. Adjusted EPS of $0.44 was a full $0.17 better than Street estimates.
And Ford is looking for that strength to continue: management said it now expects 2019 results to be better than those of 2018. Heading into the report, the Street was expecting a nearly 2% decline in revenue and EPS of $1.20 against a $1.30 print last year. As such, estimates are going to rise materially in the coming days.
Fundamentally, then, the jump in Ford stock after-hours makes some sense. There was a real fear, given long-running “peak auto” concerns, that 2018 earnings might have represented an all-time high for Ford. Auto sales in the U.S. and globally potentially were set to decline, given longer lifespans and the potential impact of autonomous vehicles. Nearer-term, tariffs added to the company’s costs.
Yet Ford earnings are rising. That’s good news from a fundamental standpoint. But it matters for reasons that go beyond just the numbers.
A Shifting Narrative Surrounding Ford Stock?
A business at risk of peak earnings is a business that’s likely to receive a 6-8x P/E multiple, which has been the valuation assigned to Ford stock for most of the past few years. Investors saw risks in trucks and SUVs when the economy turned and/or when gas prices moved higher. The company seemed behind in autonomous vehicles. It seemed behind in electric cars as well, with Tesla (NASDAQ:TSLA) taking the lead and European automakers like Volkswagen (OTCMKTS:VWAGY) and BMW (OTCMKTS:BMWYY) playing catch-up.
One quarter doesn’t change that narrative. And it doesn’t mean that Ford stock suddenly is going to be valued at 15x earnings, as investors price in growth. Still, the quarter, combined with recent moves, suggests that Ford might not be the laggard investors have seemed to expect.
For one, the company’s strategy relative to its existing business seems to be working. The decision to exit the sedan business saved billions in operating expenses and capital expenditures. It’s already paying dividends. Ford’s earnings slides noted that its Michigan assembly plant alone would see an increase in operating profit of over $1 billion between 2017 and 2021 simply by shifting production from cars to the Ranger truck and the pending Bronco refresh.
In China, Ford has cut its losses. European profitability would have improved were it not for the stronger dollar, and more efforts are on the way to improve business in that key region. A smaller, nimbler Ford can drive better profits and free cash flow — as Q1 results and full-year guidance seem to show.
EVs, AVs, and F Stock
Meanwhile, Ford might not be as behind as investors thought. 100 self-driving cars are expected to be on the road by the end of the year. Ford is expanding testing to a third city beyond existing efforts in Miami and Washington, D.C. And this isn’t a minor dalliance: Ford’s Mobility division had an operating loss of nearly $300 million in the quarter.
In EVs, Ford invested $500 million in privately held Rivian this week, a partnership that could improve its electric lineup. And President, Global Markets Jim Farley said on the Q1 call that the company had “a really aggressive plan”, with 16 EVs on the way in Europe.
So there seems to be a new potential path here. A smaller, leaner Ford can profit from legacy ICE vehicles by focusing on profitable trucks, SUVs, and commercial vehicles. Some of those profits can be used to keep the company relevant in electric and autonomous vehicles. Maybe Ford isn’t Tesla or Alphabet (NASDAQ:GOOG,GOOGL) unit Waymo. But at 8x earnings, it doesn’t have to be.
And that’s the case for F stock after earnings. The company’s strategy is validated by the quarter. Earnings still are growing. Progress is being made. That doesn’t sound like the profile of a company that has peaked. It sounds like the profile of a company that has a real chance to adapt to the changing automotive industry.
If investors start believing in that transformation, F stock will rise. Investors easily could assign a ~10x earnings multiple and a more reasonable 5% dividend yield. That suggests a share price of $12, at least — and would mean that Ford’s post-earnings gains are just the beginning.
As of this writing, Vince Martin has no positions in any securities mentioned.