Ford: Lack of consensus on the future
Throughout 2021, one of the most popular ideas in the disruptive, growth oriented area of the stock market is electronic vehicles. From mega-cap names like Tesla (TSLA), unproven start-ups in the SPAC space, to the traditional automotive companies who’re attempting to transition from lineups centered around combustible engines into EV’s as the world marches on into the 21st century, which is expected to be known for the transition to green energy and autonomy, investors are placing bets.
At this point in time, it’s too early to crown the eventual winners and losers. Only time will tell who eventually perfects the technology which results in large market share of this burgeoning industry. However, as Will Ebiefung of the Motely Fool put it in a recent article, “Everybody wants a good deal, and there are different ways to find one in the stock market. Some investors play it safe by buying blue-chip companies with consistent profits, while others take a riskier approach by betting on comeback stories like Ford Motor (F).”
Ebiefung cites data from consulting firm, Deloitte, which states that by 2030, 32% of all new cars sold with be EV’s. This represents an annual growth rate of 29% throughout the present decade. With this sort of growth in mind, there’s no wonder that companies, new and old, are fighting hard for a slice of this growing pie. Ebiefung’s piece makes it clear that Ford has big plans for its EV future, noting that the company’s CEO, Jim Farley, recently said, "We are not going to cede the future to anyone when it comes to electric vehicles." Ebiefung discussed Ford’s plan to invest $29 billion into EV/autonomous technologies by 2025, with a focus on the areas of the auto space where it already holds strong market share positions, such as pick up trucks, transit vans, and sports cars.
IAM News, recently reported that “Ford's all-electric Mustang Mach-E is starting to arrive in dealerships, which will be followed by the firm's first E-Transit commercial van later in the year. The beloved all-electric F-150 pickup is scheduled for release in the mid-2020s.” The IAM News piece also highlighted Ford’s recent plans “to phase out gas cars in Europe by 2030” further emphasizing its commitment towards EV development, worldwide.
And yet, the market doesn’t appear to be rewarding Ford, when it comes to a growth premium associated with its EV potential (at least, on a relative basis to its pure-play peers in the EV space). When it comes to valuation, Ebiefung says, “Tesla boasts a forward price-to-earnings (P/E) ratio of 200 and a market cap of $752 billion. Upstart EV maker NIO (NIO), which isn't profitable on an annual basis, trades for 32 times sales with a market cap of $89 billion -- almost twice the size of Ford.” Ford, on the other hand, which has experienced a nice rally as of late, with shares rising by more than 52%, year-to-date, currently trades with a forward price-to-earnings multiple of just 11.8x.
Ford’s current market cap is $53.2 billion, which is respectable, but still pales in comparison to Tesla’s, even though Ford’s annual cash flows dwarf’s Tesla’s. In 2020, Ford generated $18.5 billion in free cash flow, compared to Tesla’s annual FCF of $2.78 billion. Ebiefung concluded his bullish article, writing, “Ford stock is dirt cheap compared to much-hyped electric vehicle rivals like Tesla and NIO, making the company a good bet for investors who want to get in on the ground floor of this rapidly expanding opportunity.”
John Roevear, also of The Motley Fool, recently echoed Ebiefung’s bullish sentiment, highlighting his belief that Ford is a strong re-opening play as the vaccine rollout continues. Roevear said, “Auto sales tend to rise early in most economic recoveries, for a simple reason: People and businesses tend to postpone vehicle purchases when times are tough. And when that happens, the automakers with the freshest products tend to see the biggest bounce in both sales and profits. The post-COVID recovery won't be quite the same as a post-recession economic recovery, but I think there will be some parallels -- and I think it's enough of a parallel to warrant a closer look at Ford right now.”
Overall, analysts agree with this thesis. Right now, the consensus EPS growth rate attached to Ford in 2021 is 176%. What’s more, the consensus growth estimate for 2022 is 34%. However, even with such strong growth expectations in the future, it’s important to note that Ford’s 2022 EPS expectation of $1.51/share is still far below the $1.71/share that the company generated in 2017, showing the operational malaise that Ford has experienced in recent years as sales and cash flows struggled.
Now, on the flip side of this bounce back coin, it’s important to note that this economic sensitivity and the bottom-line volatile that it creates can be enough to keep conservative investors out of Ford shares. For instance, during 2020 and the COVID-19 pandemic, Ford’s earnings-per-share fell by 66%. And, this negative result came on the heels of a -8% EPS growth rate in 2019 and a -27% EPS growth rate in 2018.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Looking backwards, we see that Ford has posted positive earnings-per-share growth in just 3 out of the last 10 years. This points towards more secular growth issues, regarding the company’s product line. Management has taken steps to address this in recent years by cutting unprofitable lines and focusing on vehicles, such as the f-series pickups, that really resonate with consumers. However, the fact is, with the stock rising so far so fast, many of the analysts that we track offer a cautious outlook on shares.
Ford stock does appear to be very cheap, based upon its 2021 EPS expectations; however, if Ford cannot carve out meaningful market share in the EV space, this growth is unlikely to sustain itself. Due to the fact that stocks are evaluated on their future cash flow potentials and the inherent uncertainty attached to Ford’s ability to capture meaningful market share in the EV market right now, this remains a battleground stock.
Right now, Nobias tracks fourteen 4 and 5-star analysts who offer buy/sell opinions on Ford. Today, 9 of the opinions are bullish; however, 5 analysts have sell ratings on the stock, pointing towards a general lack of consensus.
Disclosure: Nicholas Ward does not have a position in Ford. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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