Shares head for first gain in 6 days; analyst raises price target by 20%
Shares of Ford Motor Co. rallied Tuesday toward their first gain in six sessions, after Morgan Stanley turned bullish on the auto maker, as the recent weakness has provided investors a low-risk opportunity to buy as the earnings outlook improves.
Analyst Adam Jonas raised his rating to overweight from equal weight, while boosting his stock price target to $12 from $10. The target is now 27% above current levels.
Jonas also raised his 2019 earning-per-share estimate to $1.30 from $1.20, his 2020 forecast to $1.20 from 83 cents and his 2021 outlook to $1.21 from 78 cents.
The stock F, +2.71% jumped 2.7% in afternoon trading to put it on track to snap a five-session losing streak. The stock had closed Monday at a four-month low of $9.23, after shedding 3.9% over the past five trading days, and 12.2% since closing at a one-year high of $10.51 on July 16.
During the stock’s selloff, the shares took a 7.5% hit on July 25 after Ford reported a second-quarter profit and revenue that missed expectations, and provided a downbeat full-year outlook.
Jonas said there are three main reasons for his upgrade:
• Ford’s restructuring actions, particularly in Europe, which includes the cutting of 12,000 jobs as part of the “rationalization” of plants in Germany, France, the United Kingdom and other European Union facilities, including one in Spain. Jonas said this should save Ford more than $1 billion a year from job cuts alone.
• Strategic actions, including the Volkswagen partnership, the deconsolidation of its mobility business and the company’s emerging plan for electric vehicles. “In our opinion, the latest iterations of the VW partnership strategy is starting to bear fruit, facilitating the spreading of new mobility costs across much higher volume of production globally,” Jonas wrote in a note to clients.
• Product mix enhancement, including new sport utilities, new F-150 trucks and the exiting of cars. “Ford’s new strategy builds on Ford’s core strengths in pick-up trucks, utilities and commercial vehicle/vans,” Jonas wrote. “We see evidence of Ford instituting a significant de-complexification of this product lineup.”
Jonas said that while he is certainly not an automotive cyclical bull, and remains “cautious” on the U.S. auto industry, the improved free cash flow and earnings outlook have largely assuaged previous concerns over Ford’s ability to maintain its dividend payment.
Ford’s current annual dividend rate, based on the most recent quarterly dividend payment of 60 cents a share, implies a dividend yield of 6.33% at current stock prices. That compares with the implied yields on the shares of rival General Motors Co. GM, +0.18% of 3.88% and Fiat Chrysler Automobiles N.V.FCAU, +2.78% of 5.51%. The implied yield for the S&P 500 index SPX, +1.30% is 2.03%, according to FactSet.
“Our earnings outlook implies free cash flow in line with or exceeding the dividend payment vs. our prior free cash flow forecasts which lagged cash return,” Jonas wrote.
Ford’s stock has rallied 24% year to date, while GM shares have advanced 17%, Fiat Chrysler shares have shed 7.9% and the S&P 500 has tacked on 15%.