Shares of U.S. automaker Ford (NYSE:F) haven’t gone anywhere in a year, as the company’s sales have dropped sharply amid the slowing growth of the U.S. economy and the steady declines of the U.S. auto market. Persistent tariff headwinds haven’t helped the outlook of F stock, either. A year ago, Ford stock changed hands for $8.80. Today, F stock price is only slightly below that level.
Sideways trading is actually a relief for those who are bullish on Ford stock. Before the last year, all Ford stock did was drop. Over the past five years, F stock price is down nearly 40%, versus a 50%-plus gain by the S&P 500.
In other words, Ford stock has been a losing investment for a long time. That’s due to a few things – namely, consistent revenue, margin, and profit erosion, against the backdrop of a stock that simply wasn’t priced for such erosion.
There’s reason to believe, however, that Ford’s worst days are behind it. That is, the consistent revenue, margin, and profit declines which have dominated Ford’s performance over the past five years could turn into consistent revenue, margin, and profit growth over the next five years.
There’s one big catalyst that can turn Ford stock around: electrification. Ford is going all-in on electric vehicles (EV) over the next five years. By taking that approach, it is better aligning itself with current demand trends and can re-ignite demand for its vehicles. That realignment should significantly and sustainably lift the company’s growth.
Below $10, Ford stock doesn’t reflect the potential for electrification to significantly boost the company’s growth over the next five years.
Investors who believe that electrification can reverse Ford’s currently depressed growth should buy Ford stock below $10.
Ford Is Going All-In on EVs
EVs are the future. They provide too-important-to-ignore environmental benefits, their economic benefits are becoming more obvious as battery costs come down, and their superior convenience is also becoming more obvious as the EV charging network gets bigger and better everyday. Also of note is that multiple surveys (see here and here) indicate that young consumers are fully embracing the EV trend.
Ford has largely missed this EV trend. The company has a few EV and hybrid models – like the Ford Fusion – but it is notably behind its peers in this market. It’s no wonder, then, that as traditional auto sales have dropped and EV sales have risen, Ford’s limited selection of EVs has caused Ford’s overall sales to take a hit.
That’s about to change. Ford is going all-in with EVs. By 2022, the company says that it will have launched 16 fully electric vehicles and 40 hybrid models. Among the EVs it plans to introduce are an electric and hybrid Ford F-150 pick-up truck, a Mustang-influenced electric crossover, and a mid-size Lincoln EV crossover. Ford also owns a big stake in Rivian, an electric pick-up truck maker that’s set to unveil its first EV truck in late 2020.
Ford is dramatically electrifying its vehicle portfolio over the next few years. That will make Ford’s auto portfolio fresher, more exciting, more relevant, and more attractive to young consumers who will be the heartbeat of the auto market throughout the 2020s. As a result, Ford’s depressed demand trends today could reverse course tremendously over the next few years thanks to electrification.
Ford Stock Looks Cheap Below $10
Below $10, Ford stock isn’t priced for this electrification-inspired demand reversal. As a result, for those who think that such a reversal will materialize, buying Ford stock seems like a good idea.
Ford’s sales have been in a persistent decline for several years, thanks to falling volumes. According to consensus Street estimates, they are expected to keep declining for the next several years. But its new EVs could spark increases in its sales volumes in 2020, 2021, and 2022. The average sales prices (ASPs) of those new EVs should be high, since they are new cars. As a result, its total ASPs and sales volumes could jump over the next several years.
That will provide a double boost for its revenues. The company’s traditional auto portfolio will likely continue to decline. Still, super-charged EV volume and ASP growth should be enough to drive low-single-digit percentage revenue growth over the next few years.
At the same time, the high ASPs of the EVs should lift its gross margins, while management’s cost-cutting measures should push costs down. Thus, alongside low single digit revenue growth, EBIT margins should trend gradually higher over the next few years.
Assuming low-single-digit-percentage revenue growth and slight EBIT margin expansion, I think Ford’s EPS can reach about $2.30 by fiscal 2025. Based on a forward earnings multiple of seven, which is the average of Ford stock for the last five years, and a 10% discount rate, that equates to a 2019 price target for F stock of exactly $10.
The Bottom Line on F Stock
Ford stock has been a losing investment for a long time. But its electric vehicles could change everything over the next few years and ultimately turn this stock into a medium-term winner.
As of this writing, Luke Lango was long Ford stock.
