From Barrons:
https://www.barrons.com/articles/ford-stock-price-pick-1b40df64
Ford Is Making a Comeback. It’s Time to Buy the Stock.
If the stock market is a race, Ford Motor is losing. But it may be ready to start closing the gap with General Motors.
Ford’s shares have advanced 5.6% this year, trailing GM’s 30% gain and the S&P 500’s 16% rise. Not much separates the two U.S. auto makers. Sales are growing at both. Ford is expected to generate some $22 billion in operating profit over 2024 and 2025, while GM is expected to generate $26 billion. Both are growing electric vehicle sales faster than the market.
The big difference has been their plans for capital return to shareholders. GM has announced or completed some $16 billion in stock buybacks, amounting to roughly 30% of its total market value, after the initial $10 billion buyback was announced on Nov. 29. Ford has stuck to dividends, paying 15 cents per quarter plus an 18-cent special dividend in March.
Underperformance by one of America’s two largest auto makers relative to the other doesn’t happen very often. When it does, the underperformer usually closes the gap, Morgan Stanley analyst Adam Jonas noted in a recent report. There just needs to be a catalyst. For Ford, it’s simple: spend less on EVs, improve quality, focus on shareholder returns.
SEE ALL THE STOCKS WE’RE BULLISH—AND BEARISH—ON Picks & Pans “We see an opportunity for Ford to narrow the gap by moving the needle toward capital discipline,” writes Jonas, who has a Buy rating and $17 price target on the stock, up 32% from Wednesday’s close of $12.87.
Don’t expect Ford to buy back stock the way GM has, says Freedom Capital Markets analyst Mike Ward. The Ford family still controls 40% of the voting power in the company’s shares, and Bill Ford Jr. is the executive board chair—and the Fords like to receive their dividends. Ford’s current plan is to distribute 40% to 50% of annual free cash flow as special dividends.
More special dividends should be coming. Ford could generate $21 billion in free cash flow over the next three years. Paying out 50% of that would amount to additional payments of up to $2.60 a share, or 20% of the current stock price. That money comes in addition to the quarterly 15-cent dividend. The stock market, though, doesn’t appear convinced. Ford shares are down 16% over the past 12 months. Ward remains hopeful, saying the company is focused more on total shareholder return.
In the past, management bonuses were based on a mix of stock performance, return on capital, profit margin, and free cash flow goals. Improved operating performance, however, doesn’t always lead to higher stock prices. Over the past decade, Ford’s operating profit margins are up about four percentage points compared with the prior 10 years. The result of all that work? Ford stock trades at 1987 levels. Now, management gets paid for total shareholder return, CFO John Lawler said at an investor conference in June.
Still, Ford needs to do more than just pay dividends and buy back shares. Its profit margins trail those of GM, something Ford plans to rectify by cutting $2 billion in costs. Part of the cost improvement starts with quality. Ford’s warranty expenses amount to about 3.5% of sales each year, higher than GM’s 3% and Toyota’s 1%. Improving to competitors’ levels could mean another $1 billion to $2 billion in annual operating profit, significant for a company expected to earn $11 billion in 2024. CEO Jim Farley acknowledged how important quality is to Ford in April, noting that quality in 2023 was 10% better than it was in 2022, and another 10% better in the current model year.
Then there is Ford Pro, which is everything the rest of the business isn’t. The division, which sells and services trucks, cars, and vans for businesses, reported a 16.7% operating margin during the first quarter. The performance generated questions from Wall Street about how Ford could monetize the division with a spinout or initial public offering. None of that is likely. What the Ford Pro segment can do is help convince investors that profits won’t evaporate in a downturn.
But the largest improvement to free cash flow will have to come from Ford’s EV business. Ford’s EV division, called Model e, lost $1.3 billion, even as the traditional car business and Ford Pro earned a combined $3.9 billion. Model e hasn’t achieved the scale or cost structure to generate consistent profits. Ford isn’t abandoning EVs, but it has to shrink those losses. That means less spending on EVs. When it released first-quarter earnings, Ford trimmed the top end of its capital spending guidance for 2024 to a range of $8 billion to $9 billion, down from a prior range of $8 billion to $9.5 billion. That might have gone unnoticed, but it amounts to slower EV spending.
Ford might also get some help from a stronger auto market. Americans are on pace to buy 16 million new cars in 2024, up from about 15.5 million in 2023. BofA Securities analyst John Murphy believes industry sales will peak around 2028 at 17 million to 18 million units. Murphy, who rates the stock a Buy, also projects Ford to pick up market share over that span. It will have newer offerings than the competition. His price target of $21 reflects a more than 60% gain in the shares.
Add it all up, and trimming the capital budget might be the best sign Ford is getting serious about its stock price. Investors should, too.f