Thursday, December 09, 2010

Ford (NYSE:F): Merrill raises target to $24 - new Street high

Merrill Lynch/BofA is out with a positive Automotive Industry call. Among the highlights:

- Ford (NYSE:F) target is raised to a new Street high of $24 (prev. $20)

- Goodyear Tire (NYSE:GT) is upgraded to Buy from Neutral

- Cooper Tire (NYSE:CTB) is upgraded to Buy from Neutral

Sales are recovering, now with two consecutive months of a SAAR of 12.3mm, a run-rate 1mm units above the Jan-Sep ’10 SAAR of 11.3mm. Merrill believes this recent acceleration in the sales pace is supportive of their above-consensus 2011 US sales forecast of 15mm units as light vehicle demand continues to recover. Meanwhile, inventory remains lean, and there appears to be price discipline among the OEMs, as industry average incentives are about $175 less per vehicle than peak 2009 levels. While the industry has been slowly recovering in volume and pricing, auto companies have been posting near record margins with volume levels that are still only just up from the trough. Therefore the firm is confident that further operating leverage can be achieved during the recovery in the cycle and that most stocks in the auto value chain remain undervalued by the market.

As Ford (NYSE:F) has been the recent poster boy of the Auto industry, here are the details:

Merrill is raising their Ford EPS estimates in 4Q10e from $0.45 to $0.48, in 2011 from $2.25 to $2.40, and in 2012 from $2.40 to $2.55. They are also increasing their price objective from $20 to $24, which is based on a P/E of 10X our 2011e. In their view, Ford’s stock should continue to outperform for a number of reasons, including, strong management, solid operating results, a consistently improving balance sheet, industry-leading product, and recovery in the U.S. sales cycle.

Solid results should continue
Ford’s financial performance over the past year has been impressive, with LTM EPS of $2.05 and automotive cash flow generation of ~$6.5bn. Merrill expects the company to continue generating solid pre-tax profits in North America and in Ford Motor Credit, and stable/improving international performances to bolster results.

Balance sheet getting stronger each quarter
Ford has made meaningful progress in shoring up its balance sheet, and they expect further improvement ahead. Merrill's current estimates imply that Ford will be comfortably net cash positive in 2011 and FMCC remains significantly over capitalized, which should drive higher value for shareholders.

Product sweet spot and common platform leverage ahead
Merrill believes Ford is entering the sweet spot of its product cadence in MY11-MY14 (please see Car Wars 2011-2014 for further detail). They are forecasting an annual U.S. replacement rate of ~30% for Ford during this timeframe, and expect greater use of common platforms/parts to drive significantly lower engineering costs.

Solid leadership at the top
It is difficult to measure the short-term success of a management team in the automotive industry, as so much is dependant upon the economic cycle. However, we believe Alan Mulally has led Ford through what is likely the worst of the downturn, and has positioned the company for success as volumes recover.

Notablecalls: So, the Ford story may be getting another leg up. The stock hit the $17 level some weeks back and has been consolidating in a 1pt range ever since. GM may be to blame as people freed up money to play the IPO.

Now we have another tier-1 firm out with very positive comments (remember, it was MSCO who first set the ball rolling back in Oct).

This may be exactly whats needed to get the stock over the $17 level. May happen today.

GT & CTB also worth watching.


John said...

My only concern is that Ford may seek to shore up their balance sheet quickly with a giant secondary stock offering. That makes holding Ford stock risky.

Gregg said...

Shore up the balance sheet quickly? Are you nuts? They are generating free cash at an absurd rate. Their bonnds are being priced at near investment grade already. Why on earth would they want to do a secondary at this point? I think you are extremly naive or short the stock tom ake such a comment.