Ebube Jones - Barchart - Tue Mar 5, 12:59PM CST
The United Auto Workers (UAW) strikes were just one of several fundamental headwinds facing legacy automakers Ford Motor Company (F) and General Motors (GM) in 2023. Against a backdrop of stubbornly persistent inflation and unusually high interest rates, high-ticket discretionary items like new cars were a tough sell for some consumers, even as COVID-era supply chain disruptions finally unraveled. While auto sales rose in 2023, the increase was fueled in part by dealer promotions, and car prices continued to decline from their December 2022 highs - at the same time that labor costs climbed higher.
However, as the electric vehicle (EV) market undergoes significant growing pains, automakers with hybrid offerings - like Toyota (TM) and Ford - could be poised to outperform. Here's a closer look at the Street-high price target that Bank of America just set for Ford stock, and how it compares to the rest of Wall Street's forecast.
Ford Stock Underperforms
Ford stock has been a long-term underperformer. The shares are up 2.8% on a year-to-date basis, compared to a gain of more than 7% for the S&P 500 Index ($SPX). And the automaker's stock is negative over the last 52 weeks, down 4.1%.
In the past 10 years, F has shed nearly 20% of its value. Even after accounting for dividends, the shares have gained just 32%, which lags the S&P's return by a considerable margin.
Speaking of dividends, income investors will note that Ford stock yields 4.66% at current levels, based on its quarterly dividend of $0.15 per share. Ford's payout ratio stands at 55%, indicating solid coverage of the dividend from adjusted earnings.
Moreover, priced at 6.90x forward adjusted earnings and 0.29x forward sales, Ford's current valuation reflects a significant discount to both its industry peers, and its own historical averages.
In terms of earnings, Ford's Q4 2023 results comfortably beat Wall Street's expectations. Ford posted EPS of $0.29, compared to the consensus estimate of $0.12 among analysts. Likewise, quarterly revenue hit $43.21 billion, topping projections by $1.62 billion.
Bolstered by the stronger-than-forecast results, Ford simultaneously announced a special dividend payment of $0.18.
Ford's Shifting EV Strategy
Longer-term, Ford is aggressively pursuing next-generation EV development, including through a secret "Skunk Works" team tasked with designing more affordable EVs to compete with pure-play EV manufacturers. With batteries still the major cost factor in EVs, bringing lower-cost models to market will be key to driving mass adoption amongst mainstream buyers.
While Ford's luxury Lincoln brand offers some pricier EV options catering to wealthier consumers, making the technology more affordable is crucial to enabling wider access. Industry-wide U.S. EV sales grew 40% year-over-year in Q4 2023, but have decelerated from prior quarters, pointing to the pressing need for more budget-friendly electric choices to boost growth.
Against this backdrop, Ford's hybrid models have been popular with consumers. "Our global hybrid sales were up 20% last year, and we expect them to be up 40% this year," said CEO Jim Farley on the conference call accompanying the Q4 release.
Revenue growth is expected to reach 5.84% at Ford this fiscal year, according to analysts, compared to 2.28% top-line expansion expected for rival GM, and 5.56% revenue growth at Toyota - which is priced at a steeper 1.12x forward sales.
What Do Analysts Expect for Ford Stock?
The average analyst recommendation for Ford stock right now is a “hold,” down from a “moderate buy” consensus two months ago. Of the 17 total analysts in coverage, 5 rate Ford stock as a "strong buy," 2 rate it as a "moderate buy," 7 suggest a “hold,” and 3 deem it a "strong sell."
The mean price target from this group is $13.74, less than 10% higher than current levels.
However, Bank of America recently reiterated its “buy” rating and $21 price target, which is the highest on Wall Street. Citing high hopes for the company's Ford Blue and Ford Pro businesses, the brokerage firm sees potential upside of 67% for Ford stock.
The Bottom Line on Ford Stock
Despite fundamental challenges, at least one analyst believes Ford still has ample upside potential from here. For investors who like the company's outlook amid its strategic shift on EVs - plus the solid earnings results, and commitment to paying back shareholders with dividends - the auto stock is worth considering at its current, bargain-priced valuation.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
