Ford Shares Could Climb 30%

Ford Shares Could Climb 30%

By Jack Hough

Ford could be headed for a big pickup next year. The company began production this past week of its aluminized F-150, a high-stakes redesign of its lucrative truck—by far the nation’s top-selling vehicle. Judging by early opinions, investors can rule out a flop. “It is the best-handling full-size pickup I’ve ever driven,” wrote a Wards Auto reviewer last week. “Impressive all around,” declared Kelley Blue Book after a 1,300-mile test drive last month.

And yet, Ford has been marked down 11% over the past year, to about $15, versus a 14% gain for the Standard & Poor’s 500 index. One reason is that, after years of steady financial progress, Ford’s earnings will drop this year on a mix of high warranty costs, poor results in Russia and South America, and lost production during the F-150 transition. Another is that the North American car and truck trade has bounced back to such robust levels that investors fear another downturn is looming.

That looks unlikely. Ford’s ugly 2014 should give way to years of better growth. The shares look likely to climb 30% in a year.

There’s more to the bull case than the F-150, but let’s start there. With an aluminum alloy replacing steel in the body, the truck weighs hundreds of pounds less than the model it replaces. Ford says this will bring up to 20% better fuel economy. With U.S. gasoline averaging $2.94 a gallon last week, down 39 cents since the beginning of the year, pump savings is perhaps a waning motivator. But the weight loss also makes for better handling, faster acceleration, and more hauling and towing power.

F-series trucks bring in the bulk of Ford’s automotive profit. General Motors re-entered the cheaper midsize pickup market with the Chevrolet Colorado and GMC Canyon. That could indirectly benefit Ford, which doesn’t sell a midsize pickup in the U.S. If GM lowers prices too far on its full-size Chevrolet Silverado and GMC Sierra trucks, it could cut into sales of its new midsize line. If GM keeps its prices relatively high, Ford can do the same, regardless of what the Ram unit of Fiat Chrysler Automobiles —a rising but still distant No. 3 in pickup sales—does.

FORD CEO MARK FIELDS, who replaced Alan Mulally, who retired in July, brought a full payload of bad news to Ford’s late-September investor day. Warranty expenses will cost $1 billion this year, with about half connected to a faulty air-bag mechanism. Operations in Europe and South America will lose more money than expected. Add in the cost to retool F-Series production lines for the new truck, and Ford says pretax profit this year will total $6 billion, short of its goal of $7 billion to $8 billion.

Wall Street expects Ford to earn $1.11 a share this year, down 31%, on $137.1 billion in revenue, down 2%. The revenue decline partly reflects Ford’s decision to pull back on low-margin sales to rental fleets. In 2015, revenue is expected to rebound 7% and earnings per share, to climb back to $1.61. The following year, earnings should approach $2 a share; the stock trades at just 7.5 times that figure.

The good news is that when the dust clears, Ford will have launched 23 new models worldwide this year, the most ever. That sets it up to continue last year’s progress on market share, which rose to 7.3% worldwide from 6.9% in 2012. Underneath the launch parade, however, the number of vehicle platforms—the basic structures on which various models are built—will shrink to 15 this year from 27 seven years ago, and Ford says it can get to nine by 2016. That’s good for reducing costs. Ford keeps cutting capacity in Europe, where losses should shrink sharply next year and turn to profits by 2016. South America looks less promising, but Ford’s market share in China has more than doubled since 2012, to 3.5%. All in all, Ford’s international operations should return to profit next year.

North America, meanwhile, should gradually go from good to better. Plant utilization is about 93% now, nearly a record. Transaction prices, too, are at record highs.

That bodes well for Ford’s balance sheet, pensioners, and shareholders. From 2009 through 2013, Ford spent $35 billion to reduce debt and shore up its pension plan. With debt manageable and pensions looking stronger, such outlays should drop to $15 billion cumulatively over the next five years, with $30 billion being spent on shareholders in the form of dividends and share repurchases, according to investment bank Sterne Agee. That’s more than half the company’s recent stock-market value. Based on 50 cents a share per year, the yield is 3.3%. The payout is expected to hit 70 cents over the next three years.

At $20, the stock would fetch 10 times projected earnings two years out, when Ford should return to normal profitability. The low valuation acknowledges that, while Ford’s numbers are much improved, it operates in a cyclical business where profits can fall quickly during downturns.

In a February comparison of Ford and GM, Ford was called stronger, but said GM, with relatively fresh pickups, could pull ahead during the long wait for the new F-150 (“Ford or GM: Which One Is the Better Buy,” Feb 3.) That theory ran off the road as soon as the story ran, around the time GM says CEO Mary Barra first learned of an ignition-switch defect that has since sapped profit and tarnished the company’s image. Ford shares are up 1% since then; GM’s are down 12%. GM could fetch a higher price next year, after its massive recall costs move into the rearview mirror. But this time around, I’ll take Ford.