Thursday, September 16, 2010

Ford (NYSE:F): Upgraded to Overweight at Barclays

Barclays Capital is upgrading Ford (NYSE:F) to Overweight from Equal-Weight with a $16 price target (prev. $15).

Ford has lagged the broader market over the last 6 months (down 11.4% vs. SP500 -2.2%) as investors have increasingly factored in the likelihood of a slower than previously expected recovery in US auto sales and have seen Ford’s share slip to 15.8% from a YTD average of 16.7% -- seemingly calling into question the popular investment thesis of Ford as a market share gainer in a rebounding US market. In doing so, investors appear to be ignoring the fundamental increase in Ford’s earnings power even in a slower growth environment, driven by favorable Ford product (and US industry pricing) on top of a stripped-down cost base – even assuming no further gains in US market share. When this earnings power is fully factored in, even lowering their US SAAR growth expectation by 1.5 mn in 2011 does not lead Barclays to reduce their Ford earnings estimates materially, with their new estimate of $2.00 remaining well above consensus of $1.84. Therefore, with the price pullback they believe Ford has compelling upside value, with their new $16 PT allowing for upside potential of 33% and hence their new 1-OW rating.

Return to near prior peak margins driven by cost cutting and pricing: Ford NA EBIT margins of 8.7% in 2010E are close to the peak achieve in 2000 of 9.9% and well above the 2005 level of -1.9%, despite units having fallen from 4.7 mn in 2000 to 3.4 mn in 2005 and 2.4 mn in 2010E. The margin expansion since 2005 has been driven by $10 bn of structural cost reduction and $7 bn of pricing improvement, which more than offset the pressures of lost volume ($7 bn headwind) and increased vehicle content ($2 bn for better outfitted vehicles).

NA margins are likely to be sustainable. Baclays believes that the overall industry in North America should continue to support price discipline, given new management teams at all of the Big Three, continued inventory moderation (assuming production slows modestly to match sales), and exchange rate pressures on Japanese OEMs. In addition, Ford benefits from creative ‘up pricing’ within its product line, using product relaunches to position higher-option products for more affluent customers at higher prices. On the cost side, Ford is just beginning to enjoy the benefits of its global architectures.

Both EV to EBITDA and especially P/E valuations attractive, in Barclays' view: With Ford’s cash generation improving its balance sheet, EV to EBITDA valuation now appears attractive, at 3.8x 2011 EBITDA. On a P/E basis, Ford is particularly cheap at 6x firm's new 2011 EPS, or 7x assuming a normalized tax rate. Risks to their valuation would either be from a double-dip recession or an intense investor focus on Ford’s admittedly underfunded US pension – which they are currently not factoring in as they believe any cash call on pension is likely to be no sooner than 2014 under new pension legislation. On the upside, Ford would likely benefit from any improvement in macro sentiment and reallocation back to consumer discretionary.

Notablecalls: Ford has been range bound lately as investors have been taking the cautious view on future SAAR numbers. J.P. Morgan was out last week (or was it 2 weeks ago) with a rather negative call on Autos/Auto Parts cutting their out-year SAAR numbers by 10-15%. This may have contributed to Ford's relative under-performance.

Now Barclays is out with a call saying Ford stands to gain even if SAAR numbers are reduced by 10-15% (1.5M). The stock is trading 6-7x EPS which seems to be on the low side.

All in all, I expect Ford to see some buy interest on this call. The call is not huge but I may be just the little push the stock needs.

Should trade $12.25 or higher today, barring a general market crash.


notablecalls said...

am I wrong here?

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