When it comes to U.S. automaker Ford (NYSE:F), you have a stock which, for five years now, has been in a secular decline. Many investors expect this weakness in Ford stock to persist for the foreseeable future, as the auto market continues to shrink with the rise of the sharing economy and as Ford loses share in that market to upstart electric vehicle companies, like Tesla (NASDAQ:TSLA).
But, I actually think the next five years could be really good for Ford. The thesis? It’s pretty simple, and based on four big ideas.
First, electrification is the future of the auto market. Second, Ford will electrify its automobile portfolio at an impressive pace over the next few years. Third, this electrification of the automobile portfolio will push revenues, margins, and profits higher into 2025. Fourth, Ford isn’t priced for any of this growth so as it materializes over the next several years, Ford will rush higher.
Pretty simple, right? I think so. That’s why I’m bullish on Ford stock as it languishes below $10 before electrification kick-starts big growth over the next five years.
Electrification Is the Future
The first big idea behind the multi-year bull thesis in Ford stock is that electrification is the future of the auto market.
This idea is pretty tangible. Everywhere you look, everything is pivoting towards electric, mostly because of a global legislative and consumer movement to save the environment and reduce carbon emissions. These carbon emissions problems aren’t going away any time soon. If anything, the more they hang around, the more pressing they become.
Thus, I think the global government and consumer push for electrification will only intensify over the next several years. Quite simply, they will intensify because they have to intensify, and pretty much everyone knows this.
Net net, by the end of next decade, it is reasonable to assume that most cars on the road will be either electric or hybrid.
Ford Is Electrifying
The second big idea behind the multi-year bull thesis in Ford stock is that Ford is finally electrifying its automobile portfolio to be more relevant in today’s increasingly electric-focused auto market.
Ford doesn’t have much an electric or hybrid car portfolio today. That’s why the company has consistently ceded auto market share for the past several years. But, that’s changing.
By 2022, the company is promising 16 fully electric vehicles and 40 hybrid models. Included in that count are the Ford Mach E, a Mustang-influenced electric crossover, and a mid-size Lincoln EV crossover that can serve as a family alternative to the Model X.
Also, Ford owns a big stake in Rivian, an electric car company set to launch the market’s first electric pick-up truck in late 2020. Rivian is also supposed to help Ford electrify its own pick-up truck portfolio, including the launch of an electric Ford F150 within the next few years.
All in all, then, Ford is in the first few innings of electrifying its automobile portfolio. Broadly, that translates into Ford is in the first few innings of making its automobile portfolio relevant again. That’s a huge positive.
Growth Will Return
By making its automobile portfolio relevant again through electrification over the next several years, Ford will turn its current adverser growth trend around.
It will all start with market share stabilization. For the past several years, Ford has steadily lost market share. Electrification will help its older vehicles regain relevance, and help the entire company regain lost market share. In regaining lost market share, Ford’s revenues will move higher. So will margins, since the company won’t have to rely on heavy discounts and promotions to drive sales.
Thus, over the next several years, electrification should bring revenue growth and margin expansion back in the Ford growth narrative. Naturally, that means profit growth will come back into the picture, too.
Ford Stock Will Run Higher
Ford is not priced for profit growth to come back into the picture. At all.
This is a stock with a forward earnings multiple (7.2) that is nearly equal to its dividend yield (6.5%). That’s pretty wild to think about. For comparison purposes, the S&P 500 trades at a forward earnings multiple (16.4) that is more than eight-fold its dividend yield (1.9%).
In other words, Ford stock is cheap – so cheap that zero growth is priced into the stock. Indeed, one could very reasonably argue that the stock is priced for continued profit erosion.
Thus, if growth does come back into the picture over the next few years thanks to electrification, Ford will run higher in a big way.
Bottom Line on Ford Stock
I like Ford stock under $10. At these levels, it’s priced for death, but, death probably won’t happen. Instead, automobile portfolio electrification over the next few years should stabilize market share and drive material gains in revenues, margins, and profits.
Those gains should converge on a depressed valuation. Ultimately, that convergence should result in Ford heading meaningfully higher over the next several years.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
