On Tuesday , the owners of Ford (NYSE:F) stock caught a much-needed break, as Morgan Stanley analyst Adam Jonas upgraded Ford stock to an “overweight” rating.
Jonas also increased his Ford stock price target from $10 to $12. The new target reflects his increased 2019 earnings per share estimate. Jonas is now looking for EPS of $1.30, up from his previous outlook of $1.20.
There are three main arguments behind his upgrade of F stock, and all three arguments held water. One of them arguably stood out above the other two, though. That is, Ford is finally restructuring its operations all over the world, cutting money-draining businesses that are never likely to bear fruit.
What the Analyst Said About Ford Stock
Jonas didn’t mince words, bluntly explaining “We are encouraged by Ford’s restructuring actions, partnerships and more focused product strategy that underpin cash flow and dividends.” He added “We view the reset of FY19 expectations following Q2 results and a 3-month low in the shares as a buying opportunity.”
That “reset” was the 7.5% post-earnings plunge Ford stock price logged the day after F posted its Q2 numbers that fell short of analysts’ average estimates. When all was said and done, F stock fell 11% from its pre-earnings peak before subsequently rebounding.
The Morgan Stanley analyst provided detailed rationales about Ford’s “restructuring actions, partnerships and more focused product strategy” that made an impression on him.
Partnerships, for instance, were a reference to a project Ford has launched with Volkswagen (OTCMKTS:VWAPY).
“In our opinion, the latest iterations of the VW partnership strategy is starting to bear fruit, facilitating the spreading of new mobility costs across much higher volume of production globally,” Jonas wrote.
The product strategy in question largely centers on strengthening its truck business at a time when interest in cars is waning.
Of the three pillars of Jonas’ bullish argument for Ford stock, however, Ford’s global restricting could have the biggest positive impact on Ford stock price.
The Right Decision
Years ago, with the North American market pretty well saturated, Detroit’s biggest names entered overseas markets.
Although such initiatives made sense, they have not been easy or consistently profitable. That’s why General Motors (NYSE:GM), for example,finally closed its South Africa plant last year.
Ford is following suit, announcing in January it would be shutting down several plants in Europe and laying off thousands of employees.
It remains unclear to what extent that move has already made an impact on Ford’s results and how much benefit has yet to be reflected in its numbers. There’s little doubt, however, that any effort it makes to improve its profitability in Europe would prove beneficial. Last year, Ford’s European arm turned $31.3 billion worth of revenue into an EBIT loss of nearly $400 million.
But Ford’s European EBIT was positive in Q1 and Q2, even before all the positive impact of cost-cutting has been fully reflected in its results.
Click to Enlarge
In the same vein, Ford announced in February that it would be closing a key plant in Brazil as part of an overhaul of its South American business, which hasn’t turned any sort of profit in years.
Shuttering plants is neither a simple nor a quick process ,though. It could take several quarters for the restructuring effort to boost Ford’s bottom line and Ford stock price.
Looking Ahead for F Stock
As Adam Jonas knows, it’s easy for investors to forget that stocks reflect where companies are going, rather than where they’ve been. Ford has long needed to make tough decisions about its international operations, and though making them will certainly hurt in the near-term, they will most definitely help Ford stock in the long-run.
Jonas is still concerned about the strength of the United States’ automobile market, and rightfully so. With the current Ford stock price near $9.50 translating into a forward-looking price-earnings ratio of 6.8 though, the worst-case scenario may already be more than baked into Ford stock.
As of this writing, James Brumley held a long position in Ford. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.
