Ford (NYSE:F): Dearborn Revolution: $3 of EPS and Investment Grade Now Within Reach - Morgan Stanley

Ford (NYSE:F) is getting some more love from the Morgan Stanley cabal this morning. Ford's target price is raised to $23 (prev. $20) as the firm sees $3 of EPS and investment Grade now within reach.

Ford is making faster progress towards $3 of EPS and an investment grade credit rating than the firm has anticipated. The company’s 3Q results encapsulate why Ford is Morgan Stanley's top pick in US autos and a Morgan Stanley Best Idea: Significant earnings beats driven by N. America and Finco driving a magnitude of free cash flow that can transform the competitiveness and the risk profile of the company. Ford produced nearly a 10% NA EBIT margin (vs. MSCO estimate of 6%) despite 3Q being their weakest seasonal quarter, US sales still near a 40-year low and Ford not having the benefit of a full ramp up of the Fiesta and no revenue from the new Explorer or Focus. From here, they expect the stock to benefit from product momentum yet to come.

Raising EPS forecasts materially. MSCO's 2011 EPS estimate of $3.00 is 50% above consensus. Following the nearly 20% 3Q earnings beat with net debt cut to ½ what the firm had forecasted, they raise their 2011 and 2012 EPS forecasts by $0.40 and $0.45 respectively. While not firm's base case, they cannot rule out mid to high teens NA margins as the SAAR recovers to 14m units next year. MSCO's $3.00 EPS assumes a 9.9% NA margin.

What's Changed
Price Target $20.00 to $23.00
2011 EPS Estimate From $2.60 to $3.00
2012 EPS Estimate From $2.10 to $2.55

Raising price target to $23 from $20 on higher earnings, higher free cash flow and ‘baked-in’ benefits of a return to investment grade. MSCO's revised target factors in the elimination of debt 1 year ahead of their prior forecast, higher medium-term earnings, a less severe decline in market share in 2011, a repatriation of $4bn of ‘stranded’ cash at the Finco and full utilization of R&D tax credits while allowing for the dilutive impact from convertible debt offers.

Ford is a concentrated and highly levered bet on the recovery of US light vehicle sales. MSCO's forecasts give Ford credit for a transformational turn-around yielding performance far exceeding its own historical averages and places the company amongst a select group of global automotive firms. However, their forecasts also factor in a number of headwinds related to increased price competition medium term with mix deterioration and regulatory headwinds longer-term. The balance of forces is still dominated by a powerful volume recovery we expect will drive 50%-type consensus upgrades for 2011. The more than 60% upside to firm's $23 price target is sufficient to justify an OW rating on the stock.

Notablecalls: As many of you remember, it was Morgan Stanley with their Oct 4 initiation call that turned Ford into a recent momo darling. Now their estimates are even higher. As much as I hate to quote Jimmy Bob Cramer, he's probably right about this one:

"...You want to see how inflation isn't that critical right now? Look at a major buyer of paint and aluminum and glass and rubber and see how it is doing: FORD (F - commentary - Trade Now)! That's a true tell, and I think it is going right to $17..."

Ford is headed to $17 in the near-term. Today I want to see it trade over the $14.50 hump which seems to be the 52-week high for the name. If it can clear that hurdle today with some real volume, there won't be much stopping it.