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In May 2020, shares of Ford Motor
F
Should you buy the stock? I see two reasons in favor — soaring demand for its electronic truck, the F-150 and a low valuation relative to other EV rivals and one against — Ford revenues are declining.
Nevertheless, if Ford can grow faster than its modest expectations, the stock will keep rising.
(I have no financial interest in the securities mentioned in this post).
Ford’s Boffo Stock Price Rise
Ford stock rose about 140% in 2021 — far more than Tesla’s roughly 50% increase.
Investors like what auto veteran Jim Farley — appointed CEO in October 2020 — has done since taking over. Two things that stand out are Farley’s promise to communicate more openly with investors and his shift of resources to the EV market — most notably the upcoming F-150 Lightning pickup.
Here are the three biggest announcements that propelled Ford’s stock, according to CNBC:
- December 10, 2021 (stock rose 9.6%). Farley confirms that Ford will triple production of the electric Mustang Mach-E to more than 200,000 units per year for North America and Europe by 2023. The day before, he said Ford had halted reservations for its F-150 Lightning at 200,000.
- October 28, 2021 (+8.7%). Ford’s third-quarter earnings included raising its yearly guidance and announcing EPS that doubled analysts’ estimates.
- May 26, 2021 (+8.5%). Ford’s investor day revealed details of the Ford+ turnaround plan
Those big Ford stock pops are continuing into 2022. Ford shares are up 7% in morning trade after it announced EV production increases. According to MarketWatch, on January 4 Ford said it plans to “nearly double production of its all-electric F-150 Lightning pickups at its Dearborn, Michigan facility to 150,000 trucks per year to meet ‘soaring customer demand.’”
Ford’s Expectations-Beating Third Quarter Report
Ford’s most recent financial report exceeded Wall Street’s expectations on revenue, earnings, and full-year vehicle demand.
On October 27, CNBC wrote that “Ford nearly doubled Wall Street’s earnings expectations and slightly beat revenue projections for the third quarter. [Ford increased] its annual guidance for the second time [in 2021]. Ford said increased availability of semiconductor chips and higher vehicle shipments in the third quarter enabled it to post higher-than-expected results.”
Although Ford’s revenue for the third quarter fell 4.85%, its $33.21 billion in automotive revenue was $670 million above the consensus. Adjusted EPS of 51 cents was 89% more than analysts expected.
Ford raised its full-year adjusted earnings guidance to a range between $10.5 billion and $11.5 billion — the midpoint of which is up 16% from its previous guidance in the range of $9 billion and $10 billion.
CFO John Lawler said Ford “expects a 10% increase in wholesale vehicle volumes in 2022 compared with this year, as the semiconductor shortage continues to impact the business,” according to CNBC.
Ford’s Low Valuation Compared to EV Rivals
Ford is likely to be worth more to investors if it can exceed its growth expectations.
How so? While Ford has the highest P/E ratio of its incumbent peers, its valuation trails that of Tesla and other EV rivals.
Here’s how Ford’s P/E stacks up compared to incumbent peers, according to the Wall Street Journal:
- Ford: 30.04
- Toyota: 10.00
- GM: 8.17
- Volkswagen: 7.74
To compare Ford’s valuation to its EV peers, I am using a price/sales ratio since most of them do not have earnings. On that basis, Ford shares are very inexpensive. Here’s how much, according to Morningstar:
- Tesla: 29.10
- Nio: 9.90
- Ford: 0.65
To be fair, Tesla just reported 87% unit volume growth in the fourth quarter of 2021.
What will it take to keep Ford’s stock rising? Analysts expect the stock to grow at a long-term rate of 67.8%, according to an average of 22 analysts compiled by FactSet. Getting there depends on whether it can accelerate its EV plans and reach an 8% “adjusted profit margin before interest and taxes by 2023,” noted CNBC.
If Ford’s total revenues can accelerate due to higher EV sales, investors may start to assign it a much higher price/sales ratio. That would make Ford stock a screaming buy.
