Last week, Ford (NYSE:F) stock graced the cover of Barron’s magazine in a piece titled: “Ford Can Be Fixed. Why Its Stock Could Double”. In a nutshell, Barron’s thinks that an electric vehicle pivot coupled with cost-savings and margin improvements could wake up the the sleepy automaker, and drive significantly undervalued Ford stock to 100% gains in a fairly short time.
It’s an interesting argument … but it’s also a flawed argument.
The reality is Ford isn’t going to double anytime soon. Yes, the future is brighter than the past for the automotive giant. But that’s not saying much, because the past 10 years have been pretty abysmal.
Going forward, vehicle portfolio electrification and cost-savings will be partially offset by increased auto market competition from new entrants and increased investment into R&D and marketing. The result will be a more stable growth trajectory for Ford. But not a great one. And at $10 today, Ford stock is already priced for stable.
As such, you shouldn’t get too excited about Barron’s saying Ford’s stock is going to double. It simply isn’t going to happen.
Electrification Tailwinds Will Be Offset by Competition Headwinds
The core tenant of the Ford stock bull thesis is that the company is electrifying its vehicle portfolio over the next few years, and that doing so will help better align the company’s supply with current auto market demand trends.
I get that argument. I really do. Indeed, I’ve been pounding on the table about Ford’s electrification turnaround for months now.
The combination of an electric Mustang (which is already shipping) and an electric F-150 pick-up truck (which will debut in 2022) will reinvigorate demand, and help Ford steer revenue growth into consistently positive territory for the next few years.
But we aren’t talking 5%-plus revenue growth here. Instead, we are talking something like 2% revenue growth, mostly because these electrification tailwinds will be met with enormous rising competition headwinds.
Tesla (NASDAQ:TSLA). Lordstown Motors (NASDAQ:RIDE). Arrival (NYSE:CIIC). Workhorse (NASDAQ:WKHS). Nikola (NASDAQ:NKLA). GreenPower Motor (NASDAQ:GP). These are all new electric pick-up truck and/or delivery van makers that are trying to eat Ford’s lunch over the next few years.
Importantly, most of this competition hasn’t showed up yet — and still, Ford has been losing global auto market share for several years, falling from 7.6% in 2018, to 7.2% in 2019, to 6.9% in 2020, per Scotia Bank figures.
In other words, even if Ford’s electrification tailwinds entirely offset competition headwinds and things remain the same, Ford will keep losing market share over the next few years. Thus, the only way Ford even maintains market share is if its new portfolio of electric vehicles drums up enough demand to entirely offset rising competition headwinds.
That could happen. But even if it does, the positive effect on Ford won’t be be market share expansion. It will be auto market share stabilization around 7%.
Stable market share sets the stage for Ford to grow revenues over the next few years, but only at a very slow and gradual pace.
Profit Margins Aren’t Rising to 8%
Another key piece of the bull thesis is margin expansion.
Specifically, Ford currently operates at one of the lowest profit margins in the auto market at ~4%. Most other automakers run at 8% operating margins. Ford management believes they can get to those levels within the next few years, paving the path for sizable profit growth.
But, again, this pathway towards big growth is clouded by competition.
Pivoting towards electric vehicles is not easy. It requires work, battery research, product development, the rejigging of assembly lines, so on and so forth. So, in order to secure a brighter future, Ford has to spend a lot of money to get there.
Once in that brighter EV future, Ford is going to have keep spending a bunch of money to market and advertise its vehicles, because the competitive landscape for electric pick-up trucks and cars will be exceptionally fierce — much fiercer than the market is today.
Against that backdrop, it’s tough to see Ford doubling profit margins. There’s maybe room for 100 to 200 basis points of margin expansion over the next few years. But 400 basis points of expansion seems unlikely with significantly higher R&D and marketing spend on the horizon.
Ford Stock Is Fairly Valued
Barron’s is right. If Ford can sustain big revenue growth and double profit margins over the next few years, F stock will double.
But, as we just discussed, those things aren’t going to happen.
Ford is going to post ~2% or lower revenue growth over the next few years. Operating margins will rise by maybe 50%, not 100%. Assuming those two more realistic scenarios, then Ford’s earnings per share won’t look like the $3 Barron’s is touting as possible. Instead, the more likely target for earnings per share is about $2 by 2025.
A 7-times forward multiple on that implies a 2024 price target for F stock of $14. Discounted back by 8.5% per year, that implies a 2020 price target of $10.
Thus, F stock is fairly valued today.
Bottom Line on F Stock
The Barron’s article calling for Ford stock to double is a few months too late. Shares have already doubled over the past few months on optimism that the company’s electric vehicles pivot and cost-savings efforts will stop the bleeding.
They aren’t going to double again anytime soon.
There’s simply too much competition flooding into the auto market for the numbers to support Ford stock at $20.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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