When Ford Motor’s (NYSE:F) legendary Bronco debuts its new model on July 9, it may re-ignite sales. Falling demand for cars, a steady surge in demand for sports utility vehicles and growth in truck sales suggest that F stock is undervalued.
The novel coronavirus pandemic delayed the car maker’s originally scheduled April debut of the Bronco. And now that the reveal is official, Ford may win more consumers interested in buying their next SUV. The Bronco will have a removable roof and doors, two engine variants (turbo I4 and V6), and possibly a manual transmission variant. But if only a fraction of the U.S. population drives a manual, Ford does not need to release this version.
Catalysts Beyond the Bronco
Ford’s Bronco is a positive catalyst for its shares. The company first announced this SUV’s return at the 2017 Detroit Auto Show. It took over three years for the company to unveil it. Its past success with the F-150, Explorer, and Ranger pickups suggests that it will excel in this automobile class. Ford has a history of building reliable, strong-performance SUVs. Investors should expect the Bronco to offer buyers the same quality.
Ford’s introduction of an all-electric F-150 pickup is critical in fending off the likes of Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA). Jim Farley, the company’s chief operating officer, said this EV, along with Ford transit van, will come to market by mid-2022. This should give the company enough time to come up with an electric pickup and van that will serve the commercial delivery markets.
At the height of the coronavirus pandemic, Amazon (NASDAQ:AMZN) and other online retailers relied heavily on back-end delivery logistics. So, Ford has a chance to supply these companies with EV solutions.
Near-term Headwinds
Ford faced a setback with a 49% decline in sales in Mexico in May. The 2,460-unit sales result suggest that the company will struggle in the near-term because of the coronavirus disruption. At the same time, stronger sales of Edge, Fusion, and Aviator offer hope for the company. Plus, the Ford F-series was the best-selling model. Outside of the Latin American market, investors may extrapolate that the demand for these models may also improve.
Ford’s two safety recalls are another disappointment, and remind investors that design flaws and quality issues continue to add to costs. Ford recalled select 2011-15 Ford and Lincoln vehicles because of a door latch issue. This affects around 2.15 million units. It also recalled select 2014-2017 Ford F-150 models having the 3.5-liter EcoBoost engine, saying, “… in affected vehicles, the brake master cylinder may allow brake fluid to leak from the brake master cylinder front-wheel circuit into the brake booster.” This recall affects 292,311 vehicles.
Valuation on F Stock
Analysts are highly bearish on Ford. The average price target is $5.41 (per TipRanks). Similarly, Stock Rover has a fair value of $4.33 and the following scores:
| Fair Value | $4.33 |
| Value Score | 91 |
| Growth Score | 57 |
| Quality Score | 45 |
| Sentiment Score | 60 |
Ford scores a 91/100 on value because of its 0.2x price/sales and 4.4x price/free cash flow ratios. Both are below the industry and S&P 500 index constituent levels. Conversely, a declining EBITDA and earnings per share this year will undermine these low ratios.
Ford still needs to lower operating costs to align with a drop in vehicle sales. It must continue spending on research and development to stay relevant in the electric vehicle market.
Ford’s history of keeping a steady course on product development suggests that it will survive in the long term. It may sell more debt if it needs to as it waits out the current slowdown. Once the economy picks up later this year and into next year, the company is positioned to grow market share in both the gas-powered and EV markets.
Disclosure: Chris Lau owns shares of Ford.
Chris is a contributing author for InvestorPlace.com and numerous other financial sites. He has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
