Morningstar

Ford Rebounds From Pandemic With Strong Q3, Q4 Won't Be

Ford had a strong third quarter with adjusted diluted EPS of $0.65 up 91% year over year and far ahead of the $0.19 Refinitiv consensus. We are raising our fair value estimate to $13 from $8.

Securities In This Article
Ford Motor Co
(F)

Ford F had a strong third quarter with adjusted diluted EPS of $0.65 up 91% year over year and far ahead of the $0.19 Refinitiv consensus. We are raising our fair value estimate to $13 from $8. Our $8 figure was developed in light of the firm’s debt laden balance sheet and the massive uncertainty in place following the onset of the pandemic. We are glad to see Ford in September finished repaying the entire $15 billion of credit line draw it borrowed in the spring, yet still finished the quarter with $29.5 billion of automotive cash and $45.5 billion of total liquidity excluding Ford Credit. Management only said of the dividend that it would update in the spring, but we think the cash-heavy balance sheet means it is coming back in 2021 as long as the pandemic does not cause massive disruption like a multimonth shutdown of North American plants like this past spring.

Our new fair value takes into account a stronger 2020 than previously modeled, less debt, a 20 basis point reduction in our weighted average cost of capital due to a change in our model’s cost of debt, the time value of money, and an increase in our midcycle automotive EBIT margin excluding equity income to 4.5% from 4%. The latter change is due to our optimism around new CEO Jim Farley longer term being able to execute on cutting warranty costs and reducing vehicle design complexity to bring more scale.

As long as COVID-19 does not shutdown the U.S. economy for a long time like in the spring, we think Ford can have a strong 2021 even with parts of the U.S. economy not in great shape. Key to 2021 will be continued cost reduction measures and good volume growth from key launches. The new generation F-150 is already in production in Michigan and will start soon in Kansas City, the all-electric Mustang Mach-E is guided to be profitable, and three Bronco models are coming with the first, the Bronco Sport, in 2020’s fourth quarter. The F-150, Mach-E, and Bronco Sport all have October 2020 production starts.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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