Monday, October 04, 2010

Ford Motor (NYSE:F): Dearborn Revolution, Initiate Overweight & $20 target - Morgan Stanley

Morgan Stanley's Autos & Auto-Related team is making a huge call on Ford Motor (NYSE:F) initiating the US automaker with an Overweigh rating and $20 price target.

Ford didn’t just avoid bankruptcy in 2009, it took advantage of exceptional economic and political circumstances to slash capacity, renegotiate healthcare, divest non-core brands, cut debt, preserve valuable tax assets and reduce its breakeven point. While the improvement to Ford’s cost structure has not gone unnoticed by investors – in Morgan Stanley's view, the revenue opportunity is significantly underestimated.

Morgan Stanley EPS estimates are nearly 40% above consensus for 2011 and 11% above for 2012. On their calculations, Ford should be well on its way to achieving an investment grade credit rating as it turns $5.4bn of net auto debt as of 2Q10 into $1bn net cash by the end of 2011 and $9bn net cash by 2013. Key assumptions that drive firm's above-consensus forecasts include:

1. Ford N. America. V-shaped US market recovery to 14m units in 2011 and 15m in 2012 as improving credit availability unleashes pent-up demand.

2. Ford Credit. Strong credit quality metrics (loan loss, delinquencies, severity) suggest finance company profits to remain higher for longer.

3. Ford Europe. European profits to beat low expectations on stable pricing and CO2/FX
headwinds to Asian rivals.

The Ford of 2010 is hardly recognizable vs. the Ford of just a few years ago. The company’s cost structure has shrunk in so many ways vs. 2006 including: a 26% reduction in plants globally, a 38% cut in global headcount (leading to a 26% improvement in sales per worker). The company has cut the number of nameplates by 67%, platforms by 44%, and dealers by 19%. Legacy liabilities have also been reduced significantly, including a 77% cut to its health care liability and a 32% cut to its non-US pension plan (as of December 2009). Ford has announced plans to close 3 Ford plants and 1 Automotive Components Holding plant in 2010-2011. Jaguar, Land Rover, Aston Martin and Volvo have been sold, while the Mercury brand is being eliminated.

The changes mean Ford is structurally stronger than it has been in decades, but some soft spots remain. Despite the capacity reduction, Wards still calculates Ford’s N. American capacity utilization at just 66% YTD. Longer-term, the company is still too dependent on N. America revenue and profit, with much less EM exposure vs. other global players such as Toyota, Nissan and VW. The company is still highly dependent on SUVs and pickup trucks for sales and profitability. To achieve the changes, Ford suffered a deteriorating financial position to $5.4bn of net debt at the end of 2Q10 vs. $2.6bn net cash at the end of 2006 and # of shares outstanding has nearly doubled – all sacrifices well worth making, in Morgan Stanley's opinion.

Firm believes Ford can achieve a 5% Auto division EBIT margin through the cycle, with normalized group earnings power of $1.60 per share. They note they can pay just over $19 for Ford on their 5-year LBO model run at a full 35% tax rate. To this they add $0.74/share NPV of deferred tax NOLs to derive their $20 price target.

Bottom line: Consensus expectations for Ford are just too low. At this stage, Morgan Stanley sees Ford as a revenue story much more than a cost story, with optionality far outside the scope of US GDP or US SAAR. At 3.4x 2011 EBITDA and 7.2x normalized PE (ex NOLs), they believe the shares do not properly discount a top-line set to grow 42% by 2015, while generating cash equal to 60% of its market cap. >60% upside makes Ford their top pick in N.A. autos and a Morgan Stanley Best Idea.

Notablecalls: This is big. I sure didn't expect Morgan Stanley to come out on Ford with such positive comments and Street high target in the near-term. Neither did anyone else, I suspect.

I suggest you take a look at how the stock acted on a Barclays upgrade about a month ago. It acted rather well, ending up 6-7% on the day (see archives). The call from Morgan Stanley is bigger, in my opinion.

Ford is headed toward $13 share level, possibly as soon as today. Barring a market crash, of course.

I suggest you don't pay up too much for it in the pre-market. Good things come to those who wait. At least sometimes.


husband said...

I completely agree with you and Morgan. The Street has not been properly valuing Ford's upside resulting from its market share gains and product lineup. Hiring Alan Mulally is THE BEST thing Ford has ever done.

Soros bought Ford at an average price of $7.53. Soros is not one to settle for a few points; on his buy alone I expected Ford to double.

Not that I can prove it, but I ran the numbers and have been of the opinion that Ford would reach $20 by June of 2011. I have had plenty of opportunities to take the money and run - my average cost per share is $5.44. Holding out for $20 is not wishful thinking in Ford's case, its a matter of running the numbers - as Morgan did.

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